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UK public finances: beware excessive pessimism

Posted on Tuesday, November 22, 2016 at 02:29PM by Registered CommenterSimon Ward | CommentsPost a Comment

The consensus view is that the outlook for the UK public finances has deteriorated significantly since the Brexit vote. Rising nominal GDP growth, however, is supporting central government receipts, suggesting only a modest overshoot of the Office for Budget Responsibility’s March forecast of net borrowing of £55.5 billion in 2016-17. The OBR’s new fiscal forecasts in tomorrow’s Autumn Statement may be too pessimistic if they assume that nominal GDP will slow in 2017 and beyond.

October public finance numbers released today were better than expected, showing cumulative borrowing in the first seven months of 2016-17 £5.6 billion lower than in the same period of 2015-16. A continuation of this rate of improvement over the remaining five months would imply full-year borrowing of about £66 billion – above the £55.5 billion OBR forecast but below a consensus projection of £70.4 billion (according to the Treasury’s monthly survey of forecasters).

The rate of improvement, however, may pick up over the remainder of 2016-17. Central government taxes and national insurance contributions rose by 4.2% over April-October from a year before, below the OBR’s March forecast of a 5.5% increase in 2016-17 as a whole. This divergence may narrow or close as taxes / NICs benefit from recent faster nominal GDP expansion.

Annual growth of nominal GDP bottomed in the third quarter of 2015 and is likely to have risen further last quarter – data will be released on Friday. Taxes / NICs are starting to reflect this pick-up, with annual growth increasing to 4.7% in the three months to October – see first chart.

The OBR in March projected that nominal GDP growth would rise from 3.6% in 2016-17 to 4.0% in 2017-18, remaining around this level over the subsequent three years. If it follows the consensus (as it usually does), these numbers may be cut to 3.0-3.5% in the Autumn Statement. Monetary trends, however, support the March forecast or even faster growth in 2017-18 – see second chart and previous post. The OBR, therefore, may be overly pessimistic about prospects for receipts and, by extension, borrowing in tomorrow’s update.

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