Turbulent Domestic Politics Cloud Fiscal Outlook & More Trending News – UP Jobs News

British politics has remained turbulent since the vote to leave the European Union in 2016.

The unstable political environment created by Prime Minister Boris Johnson’s resignation adds to existing fiscal uncertainty and, with the next general elections only over two years away, we can expect reform momentum around reining in public debt levels to slow. A new government is likely to reassess previously-announced tax increases and spending priorities as further support for vulnerable households will be required.

The UK economy faces significant challenges over coming years. We expect sharp economic slowdown next year with growth falling to around 1%, below a medium-run potential rate of circa 1.5%. This worsening economic outlook is being driven by rapidly rising policy rates as the Bank of England is rightfully determined to stop inflationary pressure from becoming entrenched amid a tight labour market and monthly inflation expected to cross 10% later this year.

A cost-of-living crisis, rising health spending and pension costs challenge fiscal outlook

The worsening cost of living crisis, rising healthcare expenditure and mounting pension costs are significant challenges for the budgetary outlook. Following a sharp rise of government debt levels to nearly 103% of GDP in 2020, higher-than-expected tax receipts and lower-than-anticipated pandemic-related spending have supported the UK fiscal outlook with debt levels falling to 95% of GDP last year. While we expect further decline to 90% this year, the pace of fiscal consolidation is then expected to slow significantly with debt levels reaching only 85% of GDP by 2027.

Figure 1: Public sector net borrowing (GBP bn) and debt-to-GDP ratio (%)

Downside risks to the fiscal outlook remain significant. The Office for Budget Responsibility has already noted that lower-than-anticipated tax receipts and higher spending, particularly higher debt interest spending due to rising interest rates, mean the budget deficit for 2022 is likely to overshoot projections.

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Despite challenges existing, Scope Ratings affirmed the UK ratings in June

Despite fiscal challenges, Scope affirmed the United Kingdom’s (AA/Stable Outlook) ratings in June. In particular, the UK’s strong institutions including robust financial-supervisory and economic- and monetary-governance frameworks are crucial in supporting the rating through a turbulent political environment.

This includes the UK’s sophisticated financial regulatory system and strong macroprudential governance framework under the Bank of England and the Financial Conduct Authority. While the UK’s fiscal framework is less binding than that of many other highly-rated European sovereigns, the independent OBR provides a strong anchor and monitoring role by holding the government to account on self-imposed fiscal objectives.

Longer run, UK public finances risk being on an unsustainable path

However, longer term, UK public finances risk being on an unsustainable path in lieu of significant policy reforms. Particularly, spending pressures related to an ageing society and the loss of motoring taxes as the country shifts towards the carbon-neutral economy are challenges for the outlook. If future governments fail to address said challenges, the OBR estimates that public debt levels will gradually rise to 100% over the next 25 years, and to nearly 320% in 50 years’ time.

For a look at all of today’s economic events, check out our economic calendar.

Eiko Sievert is a Director in Sovereign and Public Sector ratings at Scope Ratings GmbH.

This article was originally posted on FX Empire

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