UK: Autumn Statement raises deficit path by £122bn – SocGen

Brian Hilliard, Research Analyst at Societe Generale, shares his take that the OBR’s new forecasts increase the UK’s projected budget deficits by a total of £122bn over the next 5 years.

Key Quotes

“To accommodate that, Mr Hammond has scrapped the main fiscal rule of a headline budget surplus every year from 2019-20 onwards with one which requires only that the cyclically adjusted deficit is below 2% of GDP by 2020-21. The higher deficit path, combined with the ONS decision to classify the BoE’s Term Funding Scheme and its purchases of corporate bonds as adding to public sector debt, results in the debt to GDP ratio peaking at 90.2% in 2017-18 rather than at 83.7% in 2015-16.”

“The OBR assumes that Brexit proceeds in April 2019 and hits both exports and imports for the next ten years. Nevertheless, its new growth forecasts are pretty optimistic with forecasts higher than those of the Bank of England and it has not lowered its forecasts for 2019 and 2020 at all compared to its pre-referendum forecasts.”

 “The broad thrust of the Autumn Statement is much as expected but the details of the hit to the public finances from Brexit show a bigger deterioration than we thought the new Chancellor would be prepared to tolerate. He said before the Statement that he wanted to have a framework that gave him “fiscal headroom” for any further potential Brexit shocks. The OBR estimates that the new rules give him leeway of 1.2% of GDP for the deficit. That isn’t very much.”