UK to undergo further fiscal tightening in coming years?

Any revisions to the path of UK's fiscal consolidation forecast would be cautiously observed by the FX markets, if the existing fiscal year-to-date is undergoing higher growth relatively in borrowing and there is some weakness in tax reiepts.

This might increase the scope of further fiscal tightening in the years to come, putting further pressure on growth, given the exisitng fiscal balance expectations are maintained.

George Osborne's commitment to acheive fiscal surplus from balance within the parliament's life is clear and resolute, while there is some scope for the government to choose to postpone or moderately delay the pace of fiscal tightening.

As expressed in the OBR's Economic and Fiscal Outlook for July 2015, the fiscal tightening is worth about 5% of GDP on a cyclically adjusted basis over the parliament life. 

"The improvement in the fiscal balance will largely be achieved through welfare cuts (£34.9bn) and net tax increases (£22.6bn). We forecast it will weigh most heavily on private consumption, slowing its growth from 2.9% in 2015 to 1.9% in 2016 and finally 1.6% in 2017", anticipates Barclays. 

This brings markets to a bearish view on GBP/USD and particularly under-conscious UK GDP forecast for 2016 and 2017. These GDP components will contribute much less to the growth of GDP over the next two years as the EU referendum and the fiscal tightening risk discourages these economic parts' activities.

"The second release of Q3 UK GDP is likely to be confirmed at 0.5% q/q. The details should reveal growth continues to be driven by private consumption and investment", added Barclays.