Abandoning George Osborne’s deficit reduction plan will force the UK to tap the bond market for an extra £40 billion per year, according to analysts at Deutsche Bank.
One of Philip Hammond’s first moves on becoming Chancellor was to abandon predecessor George Osborne to reach a budget surplus by 2020 (collecting more in taxes than the government spends.)
Hammond said in July: “The economy has taken a shock. We will take whatever measures are necessary to restore confidence, stabilise the economy as we move forward with the negotiating process.”
Since then, the Chancellor of the Exchequer Phillip Hammond has followed through on his commitment to boost the economy through spending, this week announced a £5 billion housing promise and has hinted at other possible stimulus measures. The fiscal stimulus is a stark contrast to the loose monetary policy favoured by George Osborne.
Even without the fiscal stimulus, abandoning the deficit reduction plan will force Britain to borrow a lot more. Here’s Deutsche Bank strategist Jack Di-Lizia (emphasis ours):
“Comments from Prime Minister May and Chancellor Hammond have materially increased the likelihood of a shift in the policy mix away from monetary towards fiscal policy.”
“Hammond could begin signalling a new fiscal package for the next Budget. As we estimated last week, based simply on a deterioration of the deficit (no new spending plans) we would expect £10 billion funding requirement this fiscal year and £30-40 billion from 17-18 onwards relative to the DMO’s March projections.”
Here’s the chart from Deutsche Bank:
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