REPEAT: MNI: UK Budget: Housing Assoc, TFS To Aid Debt Profile

Repeats Story Initially Transmitted at 18:47 GMT Nov 21/13:47 EST Nov 21

--Reclassifying Housing Assocs, Ending Of BOE TFS To Soften Debt Outlook

By David Robinson

     LONDON (MNI) - The UK Budget, expected from Chancellor of the Exchequer

Philip Hammond Wednesday, has undergone last minute changes as he wrestles with

fiscal and political constraints, people familiar with the process have told

Market News, but recent developments will flatter the debt profile.

     On Monday, Hammond was asked by Bank of England Governor Mark Carney if the

Treasury would indemnify a stg25 billion increase in the BOE's Term Funding

Scheme (TFS). Hammond's decision to approve it pushes up current debt but lowers

debt levels four years out, helping meet the Treasury's goal. 

     Earlier this month, English housing associations were reclassified as

private sector entities, knocking more than stg60 billion off the UK

government's debt pile.

     When parliament approved changes to English housing associations, this

paved the way for them to be moved from the public sector to the private sector

as of November 16.

     A National Statistics official said that English housing association debt

at the end of March had been estimated at stg63.5 billion with net borrowing

from the sector at just stg3 billion for the 2016/17 fiscal year, with the

associations adding stg2.7 billion to the net cash requirement.

     The reclassification will show up in the December 21 public finances

release, with the removal of housing association debt alone reducing the level

of debt by more than 3% of GDP.

     The reduction in the debt level will be partially offset by the extra stg25

billion increase in the TFS, but the important thing for Hammond is that lending

through the TFS is due to be repaid in four years' time, which is timely as the

Chancellor has a fiscal goal of reducing debt from 2020. Extra lending now

simply boosts repayments around the time Hammond wants the debt-to-GDP ratio to

be heading lower.

     Ross Campbell, Director, Public Sector at the Institute of Chartered

Accountants of England and Wales, previously told Market News that because of

the TFS "the Chancellor has a much better chance of achieving his 2020 target of

a falling debt to GDP ratio than might be the case without this effect."

     The smoke and mirrors on the debt arithmetic does little, however, to help

Hammond with deficit reduction and he is likely to stick to his previously

loosened aim of getting the public finances into balance in the next parliament.

     Faced with a resurgent opposition Labour Party that is championing

investment spending, Hammond is expected to continue to differentiate himself by

arguing in favour of prudent management of the public finances.

     Hammond's fiscal objectives, as set out in full in the March Budget, were

to "return the public finances to balance at the earliest possible date in the

next Parliament," for the structural deficit to be below 2% of GDP by 2020-21

and for net debt to GDP to fall in fiscal year 2020-21.

     The Office for Budget Responsibility provides a five year forecast, two

years longer than the BOE publishes. Nevertheless, with the next parliament not

set to start until 2022 this means that the OBR on Wednesday will state that it

will not be be able to fully assess the likelihood of the balanced budget goal

being met.

     What it can do is assess the likelihood of Hammond meeting the interim

target, of getting the deficit below 2% of GDP by 2020-21, and in March it

estimated that the deficit would fall from 2.6% of GDP in 2016-17 to just 0.9%

of GDP in 2020-21.

     Robert Chote, The head of the OBR, has set out why it is likely to cut its

productivity estimate, which would reduce growth and projected revenue

throughout the five year forecast. 

     Analysts expect the OBR to lower its productivity estimate to around 1.5% a

year, as it follows the BOE in assuming that growth rates of around 0.4% a

quarter are sufficient to nibble into economic slack.

     Carney seemed to give the game away when he said at the November Inflation

Report press conference that "I think you'll find that our productivity forecast

is not that dissimilar from the OBR's." 

     The Bank downgraded its productivity estimate because labour supply, with

unemployment at 4.3%, is getting tight, Brexit is expected to disrupt supply

chains and investment growth has been relatively slow.

     Hammond could simply leave fiscal policy pretty much unchanged and allow

the hit to projected revenues from the lower productivity projections to reduce,

but not eliminate, the margin of slack he has to meet his fiscal goals.

     This, largely, is what analysts expect him to do. The competing pressures

on him to come up with measures to try and improve the ruling Conservative

Party's opinion poll standings -- it has trailed Labour on average by one or two

percentage points in recent polls -- while sticking to his previous commitment

to balancing the budget means Hammond has little room for manoeuvre.

     As Fabrice Montagne, economist at Barclays said in a note, what Hammond is

likely to be able to do is avoid further austerity measures and for that at

least the chancellor will be grateful.

     The absence of any leaks of eye-catching fiscal measures suggests that "the

government will allow borrowing to creep up in response to forecast downgrades

and will not try to offset that drift by announcing new austerity measures,"

Montagne and colleagues stated.

     When the Budget is unveiled at 1230 GMT Wednesday that certainly seems the

most likely outcome.

--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