UK public finances face twin threat from Brexit and downturn, says OBR
Britain’s public finances are in worse shape to withstand a recession than they were on the eve of the financial crash a decade ago and face the twin threat of a fresh downturn and Brexit, the Treasury’s independent forecaster has warned.
The Office for Budget Responsibility – the UK’s fiscal watchdog – said another recession was inevitable at some point and that Theresa May’s failure to win a parliamentary majority in last month’s election had left the public finances more vulnerable to being blown off course than they were in 2007.
In its first in-depth analysis of the fiscal risks facing Britain, the OBR said its main message was clear: “Governments should expect nasty fiscal surprises from time to time – because policy can only reduce risks, not eliminate them – and plan accordingly.
“And they have to do so in the context of ongoing pressures that are likely to weigh on receipts and drive up spending and a variety of risks that governments choose to expose themselves to for policy reasons. This is true for any government, but this one also has to manage the uncertainties posed by Brexit, which could influence the likelihood or impact of other risks.”
The OBR said the size of the UK’s Brexit divorce bill – currently a matter of dispute between London and Brussels – would have little impact on the public finances. But it noted that even a small fall in Britain’s underlying growth rate after departure from the EU would lead to a big increase in the country’s debt burden.
“If GDP and receipts grew just 0.1 percentage points more slowly than projected over the next 50 years, but spending growth was unchanged, the debt-to-GDP would end up around 50 percentage points higher,” the OBR said.
The OBR noted that Brexit was not the only threat to the government’s aim of eliminating the UK’s budget deficit. It said a hung parliament and “austerity fatigue”, alongside longer-term developments such as a rapidly ageing population, were also factors putting upward pressure on the deficit.
The warning comes as the chancellor, Phillip Hammond, prepares the ground for his autumn budget, which he has already said should stick to current plans to bring down the deficit by the mid-2020s.
Ministers are known to have begun lobbying for more funds to give additional support to creaking services and offset the most painful cuts in welfare spending.
The OBR said: “Ongoing challenges must be faced while negotiating Brexit and in an environment of ‘austerity fatigue’. It also faces them from a starting fiscal position that is more vulnerable than that which prevailed on the eve of the crisis 10 years ago.”
A stress test of the government’s plans to manage the public finances revealed that the annual deficit could rocket back to 8.1% and the debt to GDP ratio could match Italy’s at 114%. The annual deficit for the last financial year was 2.6% of GDP – the lowest since 2007/08 – and the debt-to-GDP ratio is 85%.
Compared to the OBR’s forecast in March, the risks add £66.2bn to the deficit in 2017/18, rising to £158.5bn higher by 2021/22. It said that extra spending by the government would account for almost all the shortfall.
A series of measures dropped from the recent finance bill also played a part, the OBR said. The government scrapped 17 measures that were designed to yield £3.5bn for the Treasury.
“It is no longer clear when they will return to parliament to be legislated,” it said.