One of our areas of expertise at Cebr has been monitoring the fiscal position of governments.
 
We have developed considerable expertise in assessing the outlook for tax receipts and public spending and their impact on governments’ net borrowing. We also analyse changes in public sector accounting and presentation that might have an impact on these areas.
 
We are now planning to release reports on the government’s fiscal position on a monthly basis. We are calling it the Shadow OBR Report. Every month we will update the prospects for the UK fiscal balance in the light of emerging trends for the UK and world economies and the latest ONS public finances data.
 
With the Chancellor due to stand up today to announce his Autumn Statement, it is appropriate to examine the fiscal background.
 
The prospects – which the Chancellor may well know – are unappetising.
 
While the Chancellor looks set to more-or-less hit his borrowing target for this year, with tax receipts propped up by rising household incomes and consumer spending, the outlook further ahead is much weaker.
 
When the latest Office for Budget Responsibility (OBR) forecasts are published today, they are likely to continue the tradition of being over-optimistic on the UK’s medium term economic outlook. Growth of around 2.4% per annum between 2016 and 2020 will probably be assumed. We at Cebr think average growth of  1.8% per annum is much more likely given the weak world economy, and a consequent weak outlook for business investment and exports.
 
The gap may seem small but, by 2020, UK GDP on the Cebr forecasts is nearly 3% lower than on the OBR’s predictions with a consequent (and geared) impact on government tax receipts.
 
Because the Chancellor’s forecasts rely on an implausibly high rate of growth we think that the Government’s fiscal position is much less favourable than was set out in the July Budget. The deficit will not be eliminated in the current parliament.
 
The details are set out in the table below. Essentially, by 2020/21, rather than running a surplus of £11.6 billion, we estimate that the Chancellor will be running a deficit of £18.4 billion – a ‘black hole’ of £30 billion. He is currently under pressure to increase spending in several areas, which would increase the size of this black hole. Expect a number of accounting tricks to attempt to balance the figures in today’s Statement.
 
As the economy slows after this year, the Chancellor will be forced to adjust his borrowing targets, cut spending by more or raise taxes – or some combination of the three.  What he chooses is up to him.

 

 

_{Scott Corfe
Head of Macroeconomics}

_{Unit 1, 4 Bath Street, London EC1V 9DX}

_{Direct:                     +44 (0)20 7324 2843
Switchboard:          +44 (0)20 7324 2850
Email:                      scorfe@cebr.com}