Lower growth forecasts will increase British government debt: think tank

The British government faces the prospect of increased debt on the back of lower growth forecasts, according to a report released on Tuesday by the economic think-tank the Institute for Fiscal Studies (IFS).

The London-based IFS said that by 2019/20 it estimated that, with no policy changes, lower growth could result in tax revenues being 31 billion pounds (38.33 billion U.S. dollars) lower than forecast in the British government's spring budget. This might be offset by 6 billion pounds of lower spending once payments to the EU budget are stopped when Brexit takes place.

The net effect of borrowing 25 billion pounds more than forecast in former chancellor George Osborne's spring budget would imply a deficit of 14.9 billion pounds by 2019/20, rather than the 10.4 billion pound surplus that Osborne was aiming for.

Most economic forecasters have lowered their predictions for growth and raised their forecasts for inflation over the coming five years, compared with their forecasts at the time of the former chancellor's spring budget because of changed circumstances, most notably the Brexit vote.

The new chancellor Phillip Hammond will reveal his economic plan on November 23, in the annual Autumn Statement, which has the same weight as a budget.

The IFS said in its report that if the Office of Budget Responsibility (OBR), which oversees official economic data, followed suit with a growth downgrade and an inflation upgrade, then it would be likely to downgrade tax income by 31 billion pounds, with implications for Hammond's statement.

However, the changing economic circumstances of the past six months are not all bad news for the government's budget.

The reduction of the benchmark rate in August by the Bank of England (BOE) from 0.5 percent to 0.25 percent will mean lower interest payments on government debt, saving 4 billion pounds in 2019/20.

In addition, increased inflation will make it easier to deliver on the promised 12,500 pounds income tax personal allowance and 50,000 pounds higher-rate threshold, and these are now forecast to cost 1 billion pounds, rather than 2.8 billion pounds.

Thomas Pope, a research economist at the IFS and an author of the report, said: "The new chancellor's first fiscal event will not be easy. Growth forecasts are almost sure to be cut, leading to a significant increase in the deficit even if all the very challenging spending cuts currently planned are in fact delivered."

He added: "Any decisions to increase spending or cut taxes in the short run should be taken in the knowledge that significant further austerity after 2020 looks to be on the cards." Enditem