MNI INSIGHT: Big OBR "Health Warnings" Seen If UK Oct. Budget

-Office For Budget Responsibility Likely To Produce Heavily Caveated Forecasts

For Any Pre-Deal October UK Budget 

-Even Budget With Brexit Deal To Carry Warnings Due To Rushed Process

By David Robinson

     LONDON (MNI) - The official economic and fiscal forecasts accompanying an

October Budget could well be accompanied by "health warnings" highlighting the

elevated uncertainty surrounding the figures and the difficulty in producing

them, MNI understands.

     Under normal circumstances the Chancellor of the Exchequer is required to

give the independent Office for Budget Responsibility (OBR), the official

forecaster, at least 10 weeks' notice of a Budget. According to recent

speculation, an 'Emergency Budget' could be held in less than half that time -

in the week of October 21 - as a beleaguered government seeks to push through

the UK's exit from the European Union at the current 31 October deadline.

     If so, the shape of any Brexit deal may still be unknown and in these

circumstances the OBR would likely heavily caveat its projections. Even if a

Brexit deal emerges at the 17-18 Oct. European Council, the OBR would struggle

to rework its forecasts and assumptions at such a late stage.

     The OBR is required by law to publish a single forecast and it would

condition this on a deal or no deal Brexit, depending on the stated aim of the

government. Ahead of the 31 Oct. deadline, the government will almost certainly

stick to its line that it is seeking a deal, although the details remain cloudy

and the time for the OBR to assess the likely impact of any other detailed tax

and spend policy proposals is tight.

     --CHEAPER PRODUCT

     Asked at a September 9 Treasury Select Committee hearing about producing a

forecast in four-to-six weeks, OBR Chairman Robert Chote said, "we would try to

do the best we can, and that might mean something that is not the product you

are used to seeing in normal circumstances."

     If the OBR's forecasts are not up to the usual standard, as an independent

body committed to bringing greater transparency to fiscal forecasting its

solution would be to simply highlight the greater-than-usual uncertainty,

coupled with those policy proposals where it had struggled to assess the impact

because of time or lack of detail.

     Chancellor Sajid Javid could legally get the OBR to prepare a forecast on

the basis of a deal as long as this remains the government's stated aim, and

irrespective of whether one is still likely to be concluded or not.

     In its March 2019 Economic and Fiscal Outlook forecast package, the OBR

assumed that the government would manage a smooth Brexit, securing a two-year

transition period before leaving the EU, and it could well assume that again in

October.

     The OBR added back in March that it had "no meaningful basis for predicting

the post-Brexit trading relationship beyond the near term". If the shape of the

deal remains opaque it could again make its broad brush assumptions that Brexit

would weigh on productivity growth and that import and export growth would slow

over a 10-year period.

     While these OBR projections in March already contained some health

warnings, at least the forecaster did not have to contend with such a tight

timeframe as would apply next month.

     --VANISHING HEADROOM

     Javid inherited fiscal headroom within the near-term rules - that

cyclically-adjusted borrowing should be below 2% of GDP and that debt as a share

of GDP should be falling in 2020-21 - although the room for such fiscal easing

now looks likely to be shrinking.

     The OBR said that following the release of the public sector finances data

for August today, which included new accounting treatment for student loans, "it

now seems likely that borrowing will exceed our restated March forecast for

2019-20". Some analysts now reckon the latest borrowing figures will lead to the

2% GDP limit being breached.

     Javid could simply introduce a looser fiscal framework to give himself

greater freedom for a pre-election giveaway - although it will be basing its

fiscal stance on OBR forecasts that are likely to come with big caveats.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

[TOPICS: M$B$$$,M$E$$$,MX$$$$,MFB$$$,MGB$$$]