MNI INSIGHT: May Be Too Late To Drop UK Fiscal Rules

--Strong Presumption March Budget To Go Ahead On Stated Fiscal Rules

By David Robinson

     LONDON (MNI) - The practical barriers to any material change to the UK's

March budget or substantial modifications of the government's fiscal rules are

high, despite Thursday's dramatic resignation of Treasury head Sajid Javid which

sparked market speculation of greater fiscal stimulus, MNI understands.

     The governing Conservative Party's manifesto for the December general

election set out fiscal rules including caps of 3% of GDP on infrastructure

spending and 6% on debt interest payments as a share of revenue. With public

investment currently running at around 2% of GDP, these rules, already

incorporated into this year's budget process, impose real constraints and would

mean the government would struggle to comply with them if it ramped up fiscal

stimulus.

     One plausible scenario, with time tight and the government keen to make its

mark as a reforming administration, is that the second fiscal event in 2020, the

Autumn Statement, will be revitalised and end up doing a lot of the heavy

lifting on tax policy.

     The Office for Budget Responsibility, responsible for Budget arithmetic,

normally begins its forecasting process six to seven weeks ahead of time. It

requests and analyses the fiscal rules, going through an iterative process with

the Treasury, with the latter submitting proposed fiscal changes and the OBR

assessing their likely impact on the finances, allowing the government to see if

it is on track to meet the goals.

     --OBR SEAL OF APPROVAL

     The OBR has previously dedicated an entire chapter of its Economic and

Fiscal Outlook, which accompanies the Budget, to analysing the fiscal rules and

assessing the performance of the public finances against them. While a

relatively small increase in the public investment cap would not require any

major reworking, shifting to another set of fiscal rules altogether, such as

ones based on public sector net worth, would need a comprehensive overhaul of

the Budget process.

     If the fiscal rules were submitted very late in the day the OBR could

simply state that it was unable to complete its assessment of how public

finances are performing against them.

     Much will depend on the weight the government attaches to obtaining the

OBR's seal of approval. The orthodox view is that, rather than risk the

credibility of a process the Conservatives themselves created, the government

will find a way of ensuring that the numbers add up so it can claim the finances

are on track.

     The new chancellor, Rishi Sunak, a former investment banker, will have his

own battles to fight to establish credibility, and producing a first Budget

which raises alarms at the OBR would not be an ideal way to start.

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

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