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.
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.
Important information: The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This document is intended to be for information purposes only and it 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. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall. Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors. Issued by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.