UK: Budget – Fiscal Slippage and Monetary Flexibility

Consensus Forecasts

Even before the announcement of the UK Budget on Wednesday March 20, it was already apparent that the country’s current iscal position was worse than the Office for Budget Responsibility (OBR) had been expecting. Consequently the OBR has yet again raised its budget deficit projection. In addition to this, the OBR upwardly revised the UK’s public debt profile and slashed GDP forecasts for both this year and next. Michael Saunders of Citi Research examines the economic and fiscal outlook for the UK in light of the new budget, as well as the Chancellor’s modifications to the Monetary Policy Committee’s (MPC) remit. He notes two major points. Firstly, while there is no change to the 2% CPI inflation target, the bank has greater flexibility around it. Secondly, there are now additions to the MPC’s existing “toolkit”. He concludes by predicting further economic weakness and extended fiscal austerity, but with renewed monetary flexibility. He also argues that the government lacks credible plans to stabilize or decrease the public debt/GDP ratio in the next few years.

This article was featured in a recent issue of Current Economics. You can download a sample at www.consensuseconomics.com.

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