UK may need £65b more

POST-BREXIT: Public borrowing expected to rise as govt seeks to reset budget policy

BRITAIN could borrow nearly £65 billion (RM346 billion) more than planned in the next couple of years as new finance minister Philip Hammond seeks to ‘reset’ government budget policy to ease the shock of last month’s vote to leave the European Union.

Ratings agencies and economists widely expect borrowing to rise materially next year for the first time since 2010 as Hammond has to call time temporarily on the austerity which dominated his predecessor George Osborne’s six years in office.

After taking office two weeks ago, Hammond said the darker postBrexit outlook meant policies the Conservative government had pursued since 2010 needed to change — and economists are now starting to put numbers on what this might mean.

Hammond said on Sunday the scale of any stimulus would hinge on how rapidly the economy was slowing by the time of the Autumn Statement, the half-yearly budget update that usually comes in late November or early December.

“There is going to need to be a rethink,” said Paul Johnson, director of the Institute for Fiscal Studies, a non-partisan think tank which scrutinises the public finances.

Just sticking with the plans Osborne set out in March means borrowing is likely to overshoot its target by tens of billions of pounds as tax revenues fall and spending on social security for the low-paid and unemployed rises, said Johnson.

Several economists, working partly off rules of thumb from Britain’s budget watchdog, estimate on average that borrowing this tax year and next combined will be almost £65 billion above forecast, even if the economy dodges recession.

They did not forecast further out because of uncertainty over the economy and the government’s budget plans.

Total public borrowing in 2015/2016 was £75 billion, a hefty four per cent of the gross domestic product. The Office for Budget Responsibility forecast in March it would drop to £55.5 billion this year and £38.8 billion in 2017/2018.

By contrast, Sam Hill, an economist at Royal Bank of Canada, expects weaker growth alone will stop borrowing falling this year, and see it rise to £85 billion next year — double March’s forecast.

“The numbers could get even bigger than that — and I think there’s a good chance that they do,” said Hill.

Hammond has said the Bank of England (BoE) will be the first public body to offer stimulus if needed — possibly as soon as its meeting next week — but there will be greater pressure than before on the finance ministry to act too.

Unlike when Britain last entered recession in 2008, interest rates and government bond yields are already at a record low, limiting the BoE’s scope to boost growth through rate cuts or quantitative easing.

Britain’s situation now has some parallels with Japan, where Prime Minister Shinzo Abe has ordered his government to take advantage of ultra-low interest rates to unveil a large spending package by the end of the month to spur investment. Reuters