Britain could borrow nearly £65 billion more than planned in the next couple of years as new Chancellor Philip Hammond seeks to ‘reset’ government budget policy to ease the shock of last month’s vote to leave the European Union.
Ratings agencies and economists widely expect borrowing to rise materially next year for the first time since 2010, as Hammond has to call time – temporarily – on the austerity which dominated his predecessor George Osborne’s six years in office.
After taking office two weeks ago, Hammond said the darker post-Brexit outlook meant policies the Conservative government had pursued since 2010 needed to change – and economists are now starting to put numbers on what this might mean.
Hammond told reporters on Sunday the scale of any stimulus would hinge on how rapidly the economy was slowing by the time of the Autumn Statement, the half-yearly budget update that usually comes in late November or early December.
“There is going to need to be a rethink,” said Paul Johnson, director of the Institute for Fiscal Studies, a non-partisan think-tank which scrutinises the public finances.
Just sticking with the plans Osborne set out in March means borrowing is likely to overshoot its target by tens of billions of pounds as tax revenues fall and spending on social security for the low-paid and unemployed rises, Johnson said.
Several economists – working partly off rules of thumb from Britain’s budget watchdog – estimate on average that borrowing this tax year and next combined will be almost £65 billion above forecast, even if the economy dodges recession. They did not forecast further out because of uncertainty over the economy and the government’s budget plans.
Total public borrowing in 2015/16 was £75 billion – a hefty four per cent of GDP. The Office for Budget Responsibility forecast in March it would drop to £55.5 billion this year and £38.8 billion in 2017/2018.
By contrast, Sam Hill, an economist at the Royal Bank of Canada, expects weaker growth alone will stop borrowing falling this year, and see it rise to £85 billion next year, double March’s forecast.
Hammond has said the Bank of England will be the first public body to offer stimulus if needed, possibly as soon as its meeting next week. But there will be greater pressure than before on the finance ministry to act too.
Unlike when Britain last entered recession in 2008, interest rates and government bond yields are already at a record low, limiting the BoE’s scope to boost growth through rate cuts or through quantitative easing.
If Hammond does offer more stimulus, he will have to choose how to spend it.
Long-term public investment offers the biggest boost per pound spent, according to the OBR, giving three times the return of tax cuts, and 50 per cent more than general public spending.
Its main downside is that effective projects take more time than tax cuts or public-sector pay rises, which immediately put more money in Britons’ pockets.
But Johnson and Hill say the case for investment is stronger than in a normal short-lived downturn, as uncertainty about Britain’s EU relations could weigh on the economy for years due to the likely length of exit negotiations.
Public investment has also been squeezed, dropping to £34 billion last year from £51 billion in 2009/2010.
In March, the government listed £425 billion of investment projects which needed private involvement, ranging from offshore wind farms to high-speed rail links.
If a more immediate boost was needed, tax measures which rewarded business investment would be a better option than repeating 2009’s temporary cut in value-added tax, as business spending appears weaker than consumer sentiment.
Markets were unlikely to baulk at funding a large British budget deficit at a time when even record-low gilt yields were much higher than those for Japanese and German debt, he added. Higher borrowing, however, could only be a temporary solution until the longer-run impact of leaving the EU became clear, the IFS’s Johnson said.
“If you borrow more now, you have to pay it back in the end. That will inevitably extend austerity – but with a break in the middle,” he said.