Deal or no deal, government spending will have to rise
Yesterday, despite a deterioration in the economic growth forecasts, the Chancellor benefited from an improvement in revenue projections by the Office for Budget Responsibility (OBR), giving him an additional £11bn headroom to spend. Higher receipts from income taxes and lower outgoings on interest rates added up to a £12.4bn improvement against the fiscal mandate in 2020-21 fiscal year. After the measures announced at the Spring Statement, this leaves another £26.6bn in the war chest for Brexit. Or - if a smooth transition can be achieved - for spending increases in the Autumn Budget as well as in the Spending Review.
The larger war chest of £26.6bn will not be sufficient in the event of a No-Deal Brexit, as the OBR is likely to revise its forecasts downwards for the UK economy, while more money will be required to spend on the adjustment to a new trading relationship, revenue from customs duties will fall, and the government will face greater demands for maintaining a social safety net.
On the upside, if Brexit goes smoothly, the forthcoming Spending Review will have room to increase government spending by around 1% of GDP, if the Chancellor decides to spend all of his savings pot. This outcome would be better than that promised previously, but may not be enough to address UK twin challenges of low productivity and inequality completely.
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