Reducing public debt remains a long-term challenge for the UK despite the upbeat news on the near-term outlook for growth and borrowing in yesterday’s Budget, Fitch Ratings says. This challenge is reflected in the Negative Outlook on the UK’s ‘AA’ sovereign rating.
The Office for Budget Responsibility (OBR) has raised its growth forecast for this year to 2% from 1.4% in the Autumn Statement. But downward revisions for the following two years leave the level of both real and nominal GDP by 2019 broadly unchanged from November. The OBR expects real GDP growth to be around 2% beyond 2019.
We have also revised our near-term UK growth forecasts higher in our most recent Global Economic Outlook to reflect the resilience of the economy in 2H16 following the Brexit vote. But we still forecast lower growth than the OBR this year (1.5%) and next (1.3%), with the difference mainly due to our forecast for weaker investment, due to the uncertainties about UK trade relations after Brexit.
Discretionary fiscal measures in the budget were very small, reflecting the government’s intention to move its main fiscal policy event to the autumn. Higher spending on social care and schools over the next three years is offset by changes in dividend taxation and social contributions for the self-employed. The overall impact is deficit-increasing in FY17/18 and FY18/19, and deficit-reducing thereafter – but the changes are minimal (around 0.1% of GDP in FY17/18, for example).
Currently we assume that the government debt to GDP ratio will peak in 2018, but that would still leave the UK with one of the highest public debt ratios among highly rated (‘AAA’ and ‘AA’) sovereigns. The OBR’s latest projections underscore this view. The OBR estimates that in the current financial year government borrowing will be GBP16.4bn (0.8% of GDP) lower than previously expected, due to higher-than-expected tax receipts and some underspending by government departments. But it expects the positive impact of such one-off factors and timing effects to unwind over the next three financial years.
The government’s plans imply a consolidation of around 1.6% of GDP until the end of the current parliament. Official projections point to the public deficit in structural terms falling to 0.9% of GDP by FY20/21 – below the government’s target of under 2%. But they also indicate that additional tightening is likely to be needed to meet the government’s overall objective of balancing the budget as early as possible in the next parliament.
Furthermore, the OBR expects that general government gross debt as a share of GDP will remain broadly at its current level over the next two financial years, and only start declining in FY19/20. This underlines the scale of the challenge of putting the debt ratio on a downward path.
