Autumn Statement 2016: UK faces £121 billion borrowing bill as Brexit bites

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The UK’s borrowing bill swelled by an extra £121 billion today as a Brexit bombshell hit the public finances in the Autumn Statement.

Chancellor Philip Hammond’s first set-piece event since replacing George Osborne in July was overshadowed by the soaring deficit predictions from the Treasury’s fiscal watchdog, the Office for Budget Responsibility, over the next five years.

The borrowing surge has been driven by a toxic combination of lower growth and much higher inflation thanks to the value of the pound plunging 15% since the historic vote to leave the European Union, which has also put up the Government’s cost of borrowing.

The OBR edged up forecasts for this year from 2% to 2.1% but cut them from 2.2% to 1.4% for next year and from 2.1% to 1.7% for 2018, when Brexit negotiations are expected to be at their height. Growth for 2019 and 2020 was left unchanged at 2.1%.

Economists noted the relatively modest nature of the OBR’s growth downgrades. Oxford Economics senior UK economist Martin Beck suggested: “They obviously want to avoid the egg on face delivered to the Treasury and the Bank after the dire predictions they made in the summer for this year never materialised.”

As recently as March, the OBR forecast a deficit of £55.5 billion for the present financial year, but this has swollen to £68.5 billion.

By the end of the Parliament in 2019/20 — by which time Osborne had originally planned to run a £10.4 billion surplus in the public finances — the UK will remain £20 billion in deficit.

The Chancellor also set out more details on the “fiscal reset” he promised this year after scrapping Osborne’s target of achieving an overall surplus by 2019-20. The looser fiscal corset after the Brexit shock will see Hammond tackling the underlying budget deficit, stripping out the effect of the economy’s ups and downs — and gives him leeway to invest more in the nation’s infrastructure.

Hammond wants to cut the underlying deficit to 2% of GDP by 2020 — a massive downgrade from the 2% underlying surplus predicted by the watchdog just months ago. The Chancellor now wants to balance the books “as soon as practicable” in the next Parliament.

But crucially, the OBR cut estimates for Britain’s potential growth by 2.4% as likely post-Brexit restrictions on migration add to demographic pressures, making the Chancellor’s task more difficult without tax rises or spending cuts.

Economists warned the UK will be running a deficit well into the 2020s, and BoA Merrill Lynch economist Rob Wood said: “In the longer term, the public finances were set to deteriorate as the population ages. But Brexit, by hurting productivity, along with the Government’s aim to reduce net migration markedly, will make that worse.” 

Hammond also wants debt as a share of GDP to be falling by the end of the Parliament, but the UK’s overall £1.6 trillion debt pile will fall more slowly. The watchdog now expects UK debt peaking in 2017/18 at 90.2% of GDP, compared with 81.3% in March.

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November 24, 2016 |
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