Today’s Spring Statement banks on the recent improvement in the public finances. Factoring in the Chancellor’s new spending measures, government debt is expected to fall to 79.8% of GDP by 2026-27. Borrowing is projected to be lower than previously forecast, too.
However, the risk is that the public finances may deteriorate more than expected, given the impact on the economy of Russia’s invasion of Ukraine, which could further raise commodity prices and strain supply chains.
The Office for Budget Responsibility, indeed, acknowledged that uncertainty around the outlook is particularly high this time around, and that it is too early to know the full impact of the war on the UK economy.
Some fiscal relief, immediate via the cut to fuel duty or eventual via the cut in the basic rate of income tax, may be helpful for many but, of course, is not cost-free. At this stage, we see downside risks both to the economic projections and to the budget ones.
One risk is that UK inflation continues to surprise to the upside, having reached the highest in 30 years and more than three times the 2% Bank of England target. This could further squeeze incomes.
It’s likely that the inflation data doesn’t fully reflect the impact of Russia’s invasion of Ukraine, suggesting that cost pressure could rise further, also reflecting supply problems such as shipping dislocations, shortages of key inputs, and Covid-related disruptions at Chinese ports.
In turn, this means that surging producer prices driven by global supply shortages and robust demand growth, as well as rising energy costs, have not yet fully passed through into consumer prices, potentially requiring extra support and, therefore, extra borrowing too, especially if the economy was to underperform expectations.
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Information correct as at 23 March 2022.
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