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MNI INSIGHT: UK Autumn Budget May Underestimate Gilt Issuance

By David Robinson
     LONDON (MNI) - Official forecasts that would determine issuance of UK
Treasury bonds after a possible pre-Brexit autumn budget could understate likely
borrowing needs, as they would be conditioned on a deal to leave the European
Union that may never materialise, MNI understands.
     Technocrats involved in the budget processes are acutely aware of the
complexity of the challenge, after Prime Minister Boris Johnson said on
Wednesday that his government would prepare an economic package to boost
business ahead of the Oct. 31 deadline for Brexit. The Office for Budget
Responsibility normally gets at least 10 weeks' notice to prepare its forecasts
but may have to make do with less this time. Parliament closed July 25 for its
summer break and only returns Sept. 3.
     The OBR faces the extra hurdle of being legally required to produce a
single forecast based on stated government policy and is debarred from assessing
alternative policies. This becomes problematic when the perceptions of business,
consumers and financial market participants of the likely outcome are at odds
with the official view.
     In his first statement as prime minister, Johnson said "we will do a new
deal, a better deal" with the EU, but recent betting odds have put the chances
of no deal at 30% and rising. European Commission President Jean-Claude Juncker
said the existing deal is the only agreement possible.
     Sir Charles Bean, a member of the three-person Budget Responsibility
Committee which steers the OBR, highlighted in an MNI interview last week the
difficulties of producing a single forecast when official policy and private
agents have inconsistent expectations.
     "Most of the time you just brush this under the carpet and assume that
there is not too much of a divergence. But every so often, and now is an
example, that tension might become a little bit more obvious," he said.
     Forecasters have repeatedly highlighted the difficulties of calibrating
no-deal outcomes and putting odds on various scenarios. Bean pointed out the
absurdity of producing a single, most likely (modal) forecast if two options,
such as deal and no deal, are seen as equally likely.
     "By law we are supposed to present a central forecast. The difficulty with
this is that the law may be requiring us to do something which you either don't
know how to calibrate the things - is this really a median forecast - and
secondly, suppose you are in a world in where it was bi-modal?" he said.
     Alternative scenarios, including the European Union granting an extension
to the Brexit deadline to facilitate a general election, are being touted by
political observers, but any scenario which leaves a gap between stated and
perceived government policy would remain problematic for forecasters.
--MNI London Bureau; tel: +44 203-586-2223; email:
[TOPICS: M$B$$$,M$E$$$,MT$$$$,MX$$$$,MFB$$$,MGB$$$]

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