Analyst: Why Chancellor Jeremy Hunt has less headroom than he thinks on the public finances
THE OFFICIAL Treasury watchdog may be repeating its mistake of over-estimating UK growth, Deutsche Bank analysts have warned, with the forecasting miss potentially wiping out Chancellor Jeremy Hunt’s spending power in years to come.
In forecasts published by the Office for Budget Responsibility last week, the watchdog said it expected UK GDP groth to settle around 1.75 per cent a year – some way higher than the Bank of England’s prediction of around 1 per cent.
But Deutsche Bank’s Sanjay Raja told clients in a note over the weekend that the “OBR’s track record to forecasting medium-term growth hasn’t been impressive” and said that between 2010 and 2019 were on average 0.8 per cent ahead of reality.
“As a rough rule of thumb, a near 1 percentage point miss in GDP will add close to 0.5 percentage points to borrowing… enough to more than wipe out the Chancellor’s current headroom.”
In the note Raja also suggests there is a danger that inflation could eat away at the UK’s public finances.
The official watchdog suggested that consumer price inflation would be flat in 2025 and 2026 before returning to the official target of 2 per cent.
“What if inflation ends up being higher, as we expect?” the analyst wrote. “While receipts would be lifted by higher prices boosting revenues, spending would rise even faster, driven by higher debt interest costs.”
“Big picture, the Chancellor’s room to manoeuvre is smaller than before,” Raja said, and “pressure to rejig the fiscal rules entirely will only rise from here, particularly with a general election looming.”