UK needs to find £20bn to fill the hole in public finances
Ahead of the 2016 UK Budget on 16 March, we look at how the chancellor George Osborne might consider plugging a near £20 billion black hole in public finances.
15 March 2016
Mind the fiscal gap
The UK’s public sector net borrowing numbers are currently on track to end the fiscal year almost £10 billion worse than the Office for Budgetary Responsibility (OBR) had forecast back in November.
Part of the reason behind the miss is the delay in implementing reforms of in-work benefits, along with the cancellation of the sale of publically held banking shares due to poor market conditions.
Why should this matter? After all, UK Chancellor of the Exchequer Osborne has a poor record of meeting fiscal targets.
After winning the last general election, the government legislated to introduce new fiscal rules designed to stop the ever greening of austerity.
Typically, there are three rules:
- Public sector debt as a share of GDP must fall in every fiscal year. Meeting this rule would have relied on asset sales, which may be difficult in today’s climate of uncertainty, not helped by the presence of Brexit risk.
- A cap on welfare spending. This has already been breached.
- The government mush achieve a fiscal surplus by 2019/20, with the deadline falling just days before the fixed date of the 2020 general election.
In addition to this year’s £10 billion miss, there is another £10 billion missing from the chancellor’s plans.
The OBR’s forecast for tax revenues is likely to be around £1.5-£2 billion lower from lower capital tax receipts, due to the fall in UK equity markets since November.
In addition, current fiscal plans to not have provisions for the promised cuts in personal taxes including the raising of the personal allowance, and the lowering of the higher rate tax threshold – expected to cost the exchequer around £8 billion by 2019/20.
£20bln black hole
So with around a £20 billion black-hole in the public finances and a softening economic outlook, the chancellor’s decision to blow a £27 billion windfall just four months ago by reducing austerity plans now look unsustainable.
Indeed, speaking from the latest G20 meeting last week, he admitted that he will be forced to announce fresh spending cuts.
The chancellor will be looking for additional sources of revenue, especially as the government’s tax triple-lock legally rules out increases in income tax, national insurance contributions and VAT.
- Azad Zangana
Important Information: The views and opinions contained herein are those of Schroders’ Investment team, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. UK: Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA, is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored. Further information about Schroders can be found at www.schroders.com US: Schroder Investment Management North America Inc. is an indirect wholly owned subsidiary of Schroders plc, a SEC registered investment adviser and is registered in Canada in the capacity of Portfolio Manager with the Securities Commission in Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec and Saskatchewan providing asset management products and services to clients in Canada. 875 Third Avenue, New York, NY, 10022, (212) 641-3800. www.schroders.com/us