Our chief economist comments on public finances
December 03, 2014
By John Hawksworth, PwC’s chief economist
This balancing act is based on a small net fiscal tightening in the Autumn Statement, which re-emphasises that austerity still has at least four more years to run to eliminate the budget deficit. We are in for another Parliament of pain, but there could be light at the end of the tunnel by 2020.
As expected the OBR revised up its real GDP growth forecasts slightly in the short term, but revised them down from 2016 onwards. These downward revisions seem realistic given the ongoing malaise in the eurozone, shrinking spare capacity in the UK economy and the limits to how much further household savings rates can fall.
Together with lower than expected inflation over the next couple of years, this means that projected average GDP growth is lower in cash terms over the next four years than the OBR expected in March, which translates into tax receipts in 2018/19 also being lower than expected by around £25 billion. This is despite a gradual return to positive real earnings growth from 2015, as well as continued steady jobs growth.
As the Chancellor said, however, this is offset by lower debt interest and welfare payments, as well as even tougher than planned departmental spending cuts from 2016/17 onwards. So public borrowing is higher than forecast in March by around £5 billion this year and around £8 billion next year, but returns to around previously planned levels by 2018/19.