UK budget deficit offers worrying hints for next govt

Bloomberg London | Updated on July 19, 2019 Published on July 19, 2019

Britain posted its largest June budget deficit in four years as spending surged and taxes failed to grow, underscoring the fiscal risks facing the next prime minister.

The increase means the gap in the second quarter is a third higher than a year earlier. That is a wake-up call for Conservative leadership candidates Boris Johnson and Jeremy Hunt, whose proposed spending plans have already been criticised.

“While part of the widening was driven by higher interest payments on inflation linked debt,” Samuel Tombs at Pantheon Macroeconomics said its a tentative sign that the economy is flagging. “The economy may have stagnated this quarter, payback for a strong start to the year.”

End of austerity?

After years of post-crisis austerity that narrowed Britain’s budget deficit, both candidates to be Prime Minister are seeking a change of tack, promising tens of billions of pounds of tax cuts and spending increases.

Chancellor Philip Hammond, who oversaw part of that austerity drive, has been among those critical of the plans. The outlook for the public finances is additionally uncertain because of the threat of a ‘no-deal’ Brexit hanging over the economy.

Also read: Boris Johnson faces a fight for survival before he’s even won

On Thursday, the Office for Budget Responsibility warned the leadership hopefuls that there is no free lunch when it comes to funding their commitments. The independent watchdog also said that a no-deal Brexit could add £30 billion ($38 billion) a year to the deficit, dashing any hopes of balancing the books by the mid-2020s.

“A ‘no-deal’ Brexit would hit both government revenue, through lower tax receipts, and expenditure, through the need for fiscal stimulus,” said Mike Jakeman, an economist at PwC. “But even if a ‘no-deal’ Brexit is avoided, a new chancellor is likely to bring new priorities and, with a spending review on the horizon, could sanction a period of looser fiscal policy.”

Warning bells

The latest public-finance figures show the June shortfall more than doubled from a year earlier to £7.2 billion. That left the deficit in the first three months of 2019-20 at £17.9 billion, 33 per cent more than in June last year.

Also read: UK may be entering full-blown recession: Watchdog

Higher spending and weak tax growth contributed to the widening. Spending was boosted by debt interest costs — higher RPI pushed up payments on inflation-linked bonds — and government outlays on goods and services.

The governments fiscal mandate is for structural borrowing to be below 2 per cent of GDP in 2020-21. The OBR estimates it can hit that in a ‘no-deal’ Brexit scenario, but it will be decisively missed if commitments made by Johnson and Hunt are implemented.

“The new government looks highly likely to tear up the existing rules, setting the stage for a giveaway budget in the autumn,” said Samuel Tombs. “The Conservatives are desperate to improve their poll rating and public support for austerity has crumbled, so a fiscal boost is coming”.

Published on July 19, 2019
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