MNI: UK Budget: Mild Stimulus; Off-Track To Balance Books

By David Robinson

     LONDON (MNI) - UK Chancellor of the Exchequer Philip Hammond dipped into

the Treasury's box of tricks in Wednesday's Budget, helping him to deliver a

modest fiscal stimulus but he was still unable to show the public finances on

track to hit his goal of balancing them in the next parliament.

     Office for Budget Responsibility head Robert Chote described the Budget as

"a near-term giveaway at the cost of a longer-term takeaway," and he highlighted

the lack of progress in improving the underlying finances.

     The public finances, as previewed by Market News, were flattered by the

scheduled repayments of the Bank of England's Term Funding Scheme (TFS) and the

reclassification of housing associations as private rather than public sector

entities. Absent these changes and the shrinkage in UK net debt appears glacial.

     The OBR said that stripping out the effect of the TFS and the

reclassification of housing associations, "net debt is on a very modest downward

trajectory over the forecast period as a whole."

     Chote noted that in evidence to the House of Lords, a government official

had explicitly acknowledged that the decision to change the rules surrounding

housing associations had been carried out in order to get them off the books.

     The OBR estimated that the reclassification of English housing associations

would reduce debt at the end of 2017-18 by 3.2% of GDP compared to the end of

the 2016-17 fiscal year.

     A source familiar with the OBR's thinking said that while it had to accept

the reclassification of housing associations, what it could do was to highlight

the "fiscal illusion" involved.

     Public sector net debt (PSND) excluding the TFS is projected to barely

decline, falling from 80.2% of GDP in 2017-18 to 79.1% of GDP in 2022-23.

     The BOE's TFS is not viewed as a similarly artificial device. It provides

banks with cheap four year collateralised loans, which could be perceived as

almost risk-free, but, under the accounting rules they are added to public

sector debt because the Treasury indemnifies them.

     Nevertheless, the TFS debt profile helped Hammond because the loans are

repaid just in time to help with the fiscal goal of having net debt falling as a

percentage  of GDP in 2020-21.

     "The repayment of TFS loans after four years reduces the debt ratio

significantly in 2020-21 and 2021-22," the OBR said.

     Public sector net debt was projected to fall from 86.1% of GDP in 2019-20

to 83.1% in 2020-21.

     Wednesday's Budget measures did amount to a fiscal giveaway, of stg6.045

billion in fiscal year 2018-19 and stg6.045 billion in 2019-20 but Chote noted

that the Treasury would have to come up with additional measures to balance the

books if the OBR's forecasts prove accurate.

     Chote said that "At the end of the (five year) forecast you still have a

deficit in excess of 1% of GDP," and he described achieving a balanced budget as

"challenging."

     For the Bank of England, the additional fiscal stimulus will be treated as

adding to near-term demand but the effects will not be sizeable, and the change

in the fiscal arithmetic is likely to be viewed as marginal in the monetary

policy debate.

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

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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