Fitch: UK Consolidation on Track but Fiscal Constraints Show

 The UK ('AA+'/Stable) government's autumn statement is consistent with its overall fiscal strategy and with the revised fiscal mandate, but also shows limited fiscal space if growth or revenues underperform, Fitch Ratings says.

The Office for Budget Responsibility's (OBR) new Economic and Fiscal Outlook confirms that the government is on course to meet the fiscal rules it updated in October (a surplus on public sector net borrowing in 2019-2020 and a falling debt/GDP ratio each year).

Sound economic growth that boosts tax revenues and low government borrowing costs create a favourable backdrop for deficit reduction. The surprise GBP27bn improvement in the OBR's underlying revenue forecasts over a five-year period, despite little improvement in outturns, largely reflects higher expected tax receipts. It includes the impact of modelling changes to national insurance contributions and VAT deductions.

The autumn statement used this forecast improvement to reduce spending cuts compared with previous plans. The OBR estimates an average real cut in public services spending of 1.1% a year this parliament, down from 1.6% a year over the last.

The government has reversed its main tax credit cuts proposed in the July budget, which had proved politically unpopular. The OBR notes that the cost will be eventually offset by other welfare cuts but the decision is consistent with our view that the March and July budgets represented the fastest pace of consolidation that could realistically be expected.

The measures announced in the autumn statement have small macroeconomic and fiscal impact. The OBR estimates that the aggregate easing is approximately 0.3% of GDP in 2016/2017, half of which is from the reversal of tax credit cuts. The easing gradually diminishes over the medium term.

Thus debt reduction is increasingly being driven by underlying growth and revenue trends, which could reverse (for example, if growth slows or revenue forecasts are revised back down). Using better-than-expected revenue forecasts to scale back previously announced expenditure cuts suggests that this may pose downside risks to fiscal targets.

The measures announced in the autumn statement don't affect the OBR's forecast of a GBP10bn public sector net borrowing surplus in 2019/2020, unchanged since July. Nevertheless Fitch maintains its view that the nominal deficit target implies limited fiscal flexibility to respond to modest adverse economic shocks.


Public debt remains on course to gradually fall. In the current fiscal year privatisation receipts worth approximately 2% of GDP will be the main driver of the debt reduction. Fiscal consolidation will improve the primary balance, and the OBR forecasts a primary surplus in 2017/2018.