IFS warns the UK budget deficit could hit £36 billion by 2020/21 — nearly £20 billion higher than forecast by budget watchdog earlier this year.
Persistently low productivity makes forecast downgrade a realistic prospect.
LONDON — UK Chancellor Philip Hammond faces a new £20 billion deficit black hole, according to a report from the Institute for Fiscal Studies (IFS).
The think tank said on Monday that the UK’s budget deficit could be as much as £20 billion higher than forecast by 2020/21 when the Office for Budget Responsibility (OBR) — the government’s budget watchdog —downgrades productivity forecasts.
The OBR said at the start of this month that it will have to “significantly” lower its estimates for UK productivity, writing down past estimates of productivity.
The budget deficit is the annual sum the government borrows to meet any shortfall between incoming tax receipts and its spending. In March this year, the OBR forecast that the UK deficit would be cut to £17 billion by 2020/21.
The IFS predicts that the OBR will revise that forecast up to around £36 billion if the UK does not solve its long-running productivity problem, something which has been attributed to factors including a chronic lack of investment, low interest rates, and quantitative easing.
Chancellor Philip Hammond pledged last year to eliminate the deficit entitely by the mid-2020s, but that is contingent on the country’s productivity performance. The £20 billion black hole is based on the “very poor” scenario in the two charts below:
The IFS said:
“If the OBR were to decide that the terrible productivity growth of the last seven years were now the new normal (the ‘very poor’ scenario, under which output per hour grows at just 0.4% a year), without further policy action structural borrowing would rise above 3% of national income (almost £70 billion) in 2021–22 and rise further thereafter.”
The news will dampen hopes that Hammond will unveil “giveaways” in his Autumn budget on November 23.
Colleagues including Housing Minister Sajid Javid have asked the chancellor to boost spending in order to improve the Tories’ poll ratings and to go toe-to-toe with Labour in major spending areas including housebuilding.
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Source:: Business Insider