21 Dec 2016

UK public finances: Broadly on track but Brexit challenge yet to bite

Philip Shaw

Chief Economist

The headline measure of public borrowing, PSNBx came in at £12.6bn in November. That was a just a touch higher than expected (consensus £12.2bn, Investec £12.4bn). November’s PSNB was also a little higher than expected at £12.2bn against the consensus of £11.6bn (Investec £11.9bn).

  • Today’s print shows November public borrowing (PSNBx) £0.6bn lower than the previous November. That is hardly a spectacular improvement and we note that income (and capital gains) tax receipts were fairly soft, declining by 1.1% y/y. But total receipts growth was a more creditable +3.6% y/y, aided by a +22.9% y/y increase in corporation tax. Meanwhile, year-on-year departmental spending growth was a fairly steady +3.4%. While the softness in income tax receipts in particular might be something to watch going forward, we report these numbers with a pinch of salt – the monthly data are noisy.

  • In terms of the broader trend, we note that in the fiscal year to date, cumulative borrowing currently stands £7.7bn below last year’s level. Should the narrowing in the deficit continue at this pace, total borrowing in 2016/17 would come in at £63.9bn, more than £4bn below the OBR’s forecast of £68.2bn. Moreover, one factor that could increase the pace of deficit reduction is the prospect of payback from a forestalling of self-assessed dividend tax payments last fiscal year, given changes to the system implemented in April.

  • Today marks the first public finances release since Philip Hammond’s Autumn Statement (AS) on 23 November. In the AS, a Brexit-related slowdown in the economy was judged by the OBR to lead to a substantially higher path for public borrowing than previously forecast (although the OBR does still expect PSNBx to decline in every year of its five-year forecast). So far, with the economy holding up holding up fairly well since the UK’s vote to leave the EU, there are no clear signs of a slowing in economic growth weighing on the public finances (possible weakness in income tax receipts notwithstanding).

  • However, we see Brexit-related fiscal challenges building over the coming months. We concur with the OBR’s view that the economy will slow down next year and beyond. Like the OBR, we see economic uncertainty weighing on corporate spending. Meanwhile, we reckon that post-referendum falls in sterling will drive CPI inflation above 3%, which will squeeze household real incomes. So we envisage GDP growth to slow to +1.4% next year from this year’s +2.0%, which should lead to a weakening in tax receipts. But the economic slowdown will take time to feed through to the public purse – indeed the OBR reckons that the Brexit effect will only raise public borrowing by £3.5bn in 2016/17, compared an assumed impact of £15.4bn in 2018/19. Another issue to watch related to FT reports that EU officials are looking to apply a €40-€60bn bill for Brexit so that the UK covers existing EU commitments. Meanwhile, the government might still have in mind measures to guard against too much discontent “Just About Managing” voters, of “JAMs”. So the Brexit-related fiscal challenge has yet to really begin.