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Spring Statement – PwC comments

Thursday March 14th, 2019

John Hawksworth, chief economist at PwC, comments on the Spring Statement: Government Opportunities

“The Chancellor announced some very modest increases in future public spending today, but largely bided his time until the fog of uncertainty over Brexit clears. He did promise more jam tomorrow in an Autumn Spending Review, but only if an orderly Brexit can be achieved over the next few months.

The Chancellor was able to make these conditional promises due to favourable new public finance projections from the OBR. In line with recent stronger than expected tax revenues, reflecting rising earnings from employment in particular, the OBR reduced its public borrowing forecast for this financial year by around £3 billion.

There were larger downward revisions in borrowing in future years helped also by lower projected debt interest costs. This is despite lower expected GDP growth this year and a broadly unchanged projected level of GDP in four years time.

As a result, the OBR is now projecting that the Chancellor will meet his short-term fiscal target in 2020/21 by a margin of around £26 billion, up from around £15 billion in their October 2018 forecasts. However, the OBR also estimates that forthcoming changes to the way in which student loans are accounted for in the public finances could wipe out around £12 billion of this comfort margin in 2020/21, unless the fiscal target is revised to offset this accounting change.

The OBR’s relatively rosy fiscal forecasts assumes an orderly Brexit. Provided that is achieved, the Chancellor should have some room for additional spending, or net tax cuts, at the time of his Autumn Budget and Spending Review.

If there is a disorderly ‘no deal’ Brexit, then economic growth and tax revenues are likely to be significantly lower. While fiscal policy might be relaxed in the short term to mitigate the economic pain from this shock, austerity would probably need to resume in the medium term to get the public finances back on track in a no deal scenario.”

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