Hammond Could Present Good News in Budget, EY Item Club Says

  • OBR likely to cut borrowing forecasts, raise growth estimate
  • Says fiscal policy faces ‘major challenges’ in long term

Britain will borrow less than forecast this year after the economy defied the doomsayers following the vote to leave the European Union, according to EY ITEM Club.

Surprisingly strong tax receipts should limit the deficit to about 65 billion pounds ($81 billion) in the fiscal year through March, 3 billion pounds less than officials predicted in November, the group said in a report published Monday. The economy will grow as much as 1.7 percent in 2017 instead of 1.4 percent, it said.

Chancellor of the Exchequer Philip Hammond is due to outline his annual Budget on March 8, along with new forecasts from his fiscal watchdog, the Office for Budget Responsibility. Uncertainty over Brexit could make it harder for the chancellor to deliver on his pledge to eliminate the deficit by 2025, the Institute for Fiscal Studies warned this month.

“The OBR will paint a marginally better picture of the U.K. economy and public finances in the short term, but fiscal policy faces major challenges on both the revenue and spending sides in the longer term,” said Martin Beck, an economic adviser to the EY ITEM Club, which uses the same economic model as the Treasury. “However, the continued robustness of the economy and lower-than-expected public sector borrowing mean that there is little pressure on the chancellor to use fiscal levers to support activity.”

Brexit Talks

Prime Minister Theresa May is due to start formal exit negotiations with the EU by the end of next month. The ITEM Club said that it expects the OBR to base its new forecasts on the assumption the government is successful in its aim of negotiating transitional arrangements followed by a free-trade agreement.

While the OBR may add 2 billion pounds to debt-interest costs in 2020-21 as a result of the increase in bond yields since November, Hammond’s goal of reducing the structural deficit to no more than 2 percent of national income in that year is not under threat, EY ITEM Club said. 

With the government under growing pressure as hospitals struggle to meet unprecedented levels of patient demand, Hammond may announce extra cash for health and social care, the group said.