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--Spring Statement To Show Improved Near Term UK Public Finances
--However, Higher Rate Expectations To Curb Benefits
By David Robinson
     LONDON (MNI) - UK near term borrowing needs are likely to be revised lower
in the Spring Statement Tuesday, but higher interest rate expectations will curb
the improvement in finances further ahead.
     Since the November Autumn Statement, financial markets have factored in the
likelihood of Bank Rate rising earlier and more than previously assumed. This
will drive up debt interest payments, impacting the fiscal arithmetic,
suggesting fiscal headwinds ahead.
     The way the Office for Budget Responsibility scores the Bank's quantitative
easing makes debt interest payments highly sensitive to change in Bank Rate,
Thomas Pope, analyst at the Institute for Fiscal Studies, told MNI.
     When the Bank purchases gilts through QE, it creates reserves financed at
Bank Rate. For the public finances this amounts to swapping fixed interest rate
payments on gilts for Bank Rate which is lower but variable.
     Every anticipated 100 basis point Bank Rate increase adds stg4.4 billion in
debt interest payments to the BOE'S stg435 stock of gilts, solely through the
direct QE effect. Higher Bank Rate also drives up payments on other government
debt, notably T-bills, raising the cost of a 1 percentage point rise to closer
to stg6 billion, IFS's Pope said.
     Increased rate expectations compared to those in place at the time of the
Autumn Statement are likely to add stg1billion to stg1.5 billion a year to debt
interest payments in the opening years of the next decade, on the IFS
     At present, markets are assuming that Bank Rate rises from its current 0.5%
to around 1.5% by the end of 2021. This would leave it below the 2.0% threshold
at which the MPC had said it expected to start QE unwind, but if the MPC lowers
that 2.0% threshold and/or if market rate expectations move higher, this would
hit the finances harder still, as the gilt/Bank Rate interest swap would be
     The near-term outlook for the public finances is rosier than it was in
     In January, the OBR noted that borrowing in the 2017-18 fiscal year-to-date
(April through January) was down stg7.2 billion (16.0 per cent) on a year
earlier. The OBR's November forecast was for 9.0% rise of the whole fiscal year.
"It now looks clear that borrowing in 2017-18 will undershoot our November
forecast by a significant margin," the OBR said.
     This improvement, primarily due to stronger than expected income tax
receipts, has analysts predicting the OBR will cut its  2017-18 public sector
borrowing forecast from stg50 billion to somewhere in the low stg40 billions.
Lloyds predicts it will be dropped to stg42 billion. Investec reckons around
stg40 billion, amounting to just 2% of GDP.
     The Government would be on track to meet its fiscal mandate, for cyclically
adjusted borrowing to drop below 2% of GDP in 2020-21, early. 
     Chancellor of the Exchequer Philip Hammond, however, is not expected to
offer any giveaways. He has stressed that the Spring Statement will not be a
mini-budget, but rather a simple update on the fiscal outlook.
     Analysts stress that the public finances face a tougher time ahead, with
the UK's ageing population set to make greater demands on the public sector. 
     If Hammond wants to achieve his goal of bringing overall public finances
into balance in the next parliament and keeping them there, the IFS, the
Institute for Government and the Resolution Foundation have all stressed he, or
his successor, will have to address fundamental questions about the desired size
of the state and level of tax take.
     Although the Spring Statement will provide a brighter snapshot of the
current state of the finances, but the bigger challenges lie ahead.
--MNI London Bureau; tel: +44 203-586-2225; email:
--MNI London Bureau; tel: +44 203-586-2223; email:
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