By Andrew Smith, Chief Economist at KPMG UK
Finally some good news. After three years of almost continual downgrades to the UK growth outlook on the one hand, and corresponding increases to government borrowing projections on the other, we will see a rather more upbeat Chancellor delivering his Autumn Statement on December 5. For a funny thing happened in 2013 – the economic recovery finally got underway.
After pretty much stagnating since 2010, output increased by 0.4 percent in the first quarter, 0.7 percent in the second and 0.8 percent in the third. So, for once, Mr Osborne will be able to announce a double whammy of higher output and lower borrowing projections.
As recently as the March Budget, the Office for Budget Responsibility expected growth of only 0.6 percent this year and 1.8 percent next. These forecasts are now likely to be revised closer to the consensus projections of 1.4 percent and 2.3 percent respectively, and pencilling in an even higher number for 2014 would probably not raise too many eyebrows.
As a consequence of the more buoyant economy, rising tax revenues and lower public spending should mean the budget deficit improves too. Government borrowing for this year alone could be as much as £15bn below the £120bn expected just six months ago. It is even possible that the supplementary fiscal target – that total outstanding public sector net debt should be falling as a share of GDP in 2015-16 – which the Chancellor let slide last year could be edging back into view.
What will Mr Osborne do with this ‘windfall’? The first option would be to bank it and bring borrowing down more quickly. After all, although the public finances are looking better against this year’s budget, they are still way off their originally intended track: borrowing in 2013 and 2014 is likely to come in more than double the level expected back in 2010. To recoup that slippage, austerity measures have been stacking up well into the next parliament, even before the Chancellor announced his intention to ultimately move the public finances into sustained surplus. A down payment now would lower the whole future debt profile.
The second option would be to use the additional leeway – compared to the last budget – to soften the planned public spending cuts or finance tax cuts, perhaps with an eye on the so-called cost of living crisis. But the bottom line is that scope for fiscal easing is limited as long as deficit and debt reduction remains the top priority.
The one thing which could transform the outlook for the public finances would be a significant catch-up of the output, and hence the tax revenue, lost in the last five years. But the OBR has become chary of forecasting such a period of above-trend growth and it is early days to start counting too many chickens.