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PwC: Extra £16 billion of austerity by 2018?

By Rob Starr, Content Manager,

 New PwC analysis is  projecting a structural current budget deficit of around 0.5% of GDP in 2017/18, whereas the Chancellor would need a 0.5% of GDP surplus on this basis to hit his key rolling five year fiscal target with the same margin of comfort as assumed in the March Budget. Bridging this gap would require additional current spending cuts (or tax rises) of around 1% of GDP by 2017/18, or around £16 billion at today’s GDP values.

John Hawksworth, chief economist at PwC comments:

“The public finances are not looking quite as bad as they did a few months ago, but weaker than expected tax revenues are still likely to lead to a public borrowing overshoot of around £10 billion this year, even assuming the recent small undershoot on public spending growth continues. The Chancellor will therefore have very little money to play with in his Autumn Statement on 5th December.”

There are two key differences that drive the gap between public borrowing as projected now by PwC and the OBR borrowing forecasts in March:

  • the PwC projections take account of a potential public borrowing overshoot of around £10 billion this year driven in particular by lower than expected receipts from VAT and corporation tax (especially from North Sea oil and gas companies); and
  • in future years, the PwC projections assume a medium term trend growth rate of 2% as compared to the OBR assumption of 2.3% (the actual GDP growth rates in the table above are projected to be somewhat higher than these trend growth rates due to the scope to grow above trend for a period in order to close an initial spare capacity gap estimated at around 2.5% of GDP in 2011/12).

Other trends include the fact that public borrowing looks set to exceed OBR forecasts by around £10 billion this year.

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