EXPERT VIEW: Adam Chester, Head of Economics, Lloyds Bank Commercial Banking
“Tomorrow’s budget will have to strike a difficult balance. Improvements to the public finances had given some room to ease policy, but that will be squeezed when the Office for Budget Responsibility revises down its growth forecasts on Wednesday. The commitment to reducing the so-called structural budget deficit to below two per cent of national income by 2020-21, gives us a framework to assess how much room there is for any giveaways.
“At the March Budget, the structural deficit was forecast to undershoot the two per cent target by £26bn. It’s now set to fall £6-8bn short of the March forecast, mainly due to stronger-than-expected tax receipts. However, the OBR warned it will dial down its productivity forecasts, and we estimate a 0.4 per cent downward revision would increase the structural budget deficit by around £15-£20bn. On top of this, new funds are being sought for areas including Northern Ireland, public sector pay and the NHS, which would likely mean breaching the two per cent cap. However, we suspect any available wiggle room would be used to fund a modest fiscal giveaway in order to keep borrowing and debt projections on track.”