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19 Mar 2014
Flash: UK fiscal outlook unchanged - BAML
FXStreet (Guatemala) - Strategists at Bank of America Merrill Lynch explained, as they expected, the Chancellor set out a fiscally neutral Budget.
Key Quotes:
“New discretionary fiscal measures amounted to a net 0.1% of GDP or less in all years. And with the broader economic outlook very much unchanged since the Chancellor's previous forecasts in December, the aggregate fiscal picture was also little changed: the fiscal deficit showed an improvement of around 0.2% of GDP per annum over the medium term”.
“That still leaves the UK deficit very large, at 6% of GDP in fiscal year 2013/14 and 5% of GDP in fiscal year 2014/15, though, only falling below the Maastricht 3% limit in 2016/17.”
“Against that backdrop, despite there being an election just over a year away (May 2015) and the Chancellor forecast to meet his fiscal rules over the medium term, he did not engage in a material fiscal loosening”.
“Revisions to the Government's economic forecasts were unsurprising, with the 2014 GDP growth outlook revised up from 2.4% to 2.7%, into line with consensus, and the CPI inflation outlook revised down as a result of recent out turns. Elsewhere, the Office for Budget Responsibility (OBR) chose to over-write their usual methods of estimating the degree of slack in the economy, since they suggested that output was essentially back to equilibrium (as highlighted in the FT a few days ago). Instead they judged that there was around 1.5-2.0% of slack in the economy”.
“The BoE estimate is that there is around 1.0-1.5% of spare capacity at present, though the two are not strictly comparable: once the definitional differences between them are accounted for, they are not radically different”.
“But, more generally, the narrower spare capacity in the economy, the worse the underlying fiscal position, as there is less room for stronger GDP growth to improve the public finances, but the greater underlying inflationary pressures. So it is a key, but highly uncertain, issue for both the BoE and the underlying fiscal position. In that context, this morning's labour market data added weight to the view that spare capacity is narrowing”.
Key Quotes:
“New discretionary fiscal measures amounted to a net 0.1% of GDP or less in all years. And with the broader economic outlook very much unchanged since the Chancellor's previous forecasts in December, the aggregate fiscal picture was also little changed: the fiscal deficit showed an improvement of around 0.2% of GDP per annum over the medium term”.
“That still leaves the UK deficit very large, at 6% of GDP in fiscal year 2013/14 and 5% of GDP in fiscal year 2014/15, though, only falling below the Maastricht 3% limit in 2016/17.”
“Against that backdrop, despite there being an election just over a year away (May 2015) and the Chancellor forecast to meet his fiscal rules over the medium term, he did not engage in a material fiscal loosening”.
“Revisions to the Government's economic forecasts were unsurprising, with the 2014 GDP growth outlook revised up from 2.4% to 2.7%, into line with consensus, and the CPI inflation outlook revised down as a result of recent out turns. Elsewhere, the Office for Budget Responsibility (OBR) chose to over-write their usual methods of estimating the degree of slack in the economy, since they suggested that output was essentially back to equilibrium (as highlighted in the FT a few days ago). Instead they judged that there was around 1.5-2.0% of slack in the economy”.
“The BoE estimate is that there is around 1.0-1.5% of spare capacity at present, though the two are not strictly comparable: once the definitional differences between them are accounted for, they are not radically different”.
“But, more generally, the narrower spare capacity in the economy, the worse the underlying fiscal position, as there is less room for stronger GDP growth to improve the public finances, but the greater underlying inflationary pressures. So it is a key, but highly uncertain, issue for both the BoE and the underlying fiscal position. In that context, this morning's labour market data added weight to the view that spare capacity is narrowing”.