Borrowing likely to come in below expectations, EY Item Club predicts

20 Feb 17

The chancellor can expect borrowing figures to be lower than expected when the Office for Budget Responsibility makes its forecast ahead of the spring Budget, the EY Item Club has said.

In a budget preview released today, the forecasting group, which uses official Treasury figures, also said that GDP growth might be greater than anticipated.

Philip Hammond will present the spring Budget to parliament in a fortnight’s time on March 8.

Stronger-than-expected tax receipts are relieving the pressure on borrowing, and the group predicts the OBR will cut its borrowing forecast by £3bn to £65bn in the current fiscal year. It also anticipates the OBR report to revise GDP growth upwards from 1.4% to 1.6%-1.7%.

Martin Beck, senior economic advisor the EY Item Club, said: “The OBR will paint a marginally better picture of the UK 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.”

Beck added: “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 or fill in any fiscal ‘black hole’.”

However, Beck cautioned that the OBR was unlikely to amend its longer-term expectations, because the impact of Brexit on GDP growth was likely to develop beyond 2021 – outside the scope of its forecast.

He said: “We suspect there will be few changes given that lingering questions around the UK’s post-Brexit trade relations with the EU and migration policy are likely to go unanswered for some time yet.”

Moreover, he said it was difficult to predict the scale of Britain’s Brexit ‘divorce bill’. This was because any payments involved would likely be spread over a long period, and would not necessarily impact on the OBR’s forecast.

The Item Club predicted the chancellor may seek to raise the tax-free personal allowance and the threshold for the 40% rate of income tax, in line with Conservative manifesto pledges.

Moreover, it suggested pressure on the NHS budget and the funding crisis in social care could lead Hammond to relax the spending constraints of the 2015 Spending Review, sanctioning a small rise in borrowing.    

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