We have warned in recent months of upside risks to UK inflation, plus the risk
that the election will produce a hung parliament which is unable to quickly
establish a credible path back to fiscal sustainability. These worries have not
been calmed by the Budget and latest inflation data. Gilts and sterling remain
vulnerable, and the MPC may feel compelled to hike rather earlier than
markets project to cap inflation expectations.
Budget Fails to Establish Path Back to Fiscal Sustainability
The Budget acknowledged that this year’s deficit will undershoot the PBR
plans by about £11bn, largely because of a revenue rebound, but failed to
tackle the UK’s medium-term fiscal outlook, which is the key issue.
The government’s fiscal forecasts remain relatively unambitious compared to
other high deficit countries. The Budget projected that the fiscal deficit will fall
to 4-4.5% of GDP in 2014/15, whereas other high deficit EU countries expect
to get their deficits to 3% of GDP or less over that timeframe (and generally
before 2014). As a result, the UK government continues to forecast a more
extended rise in the public debt/GDP ratio than other EU countries, with the
debt/GDP ratio not peaking until 2013/14 – a year later than Portugal,
Ireland and Spain, two years later than Greece and three years later than Italy.
Moreover, the UK lacks credible plans to achieve even that relatively
unambitious fiscal path. The government’s fiscal forecasts rely chiefly on a
plunge in the public spending/GDP ratio from 48% in 10/11 to 42.5% in 14/15.
But, these are just forecasts. There are no plans for either total public
spending or for spending by individual government departments beyond the
10/11 fiscal year. Without these, the fiscal forecasts lack credibility.
See the full report here.
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