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UK's upbeat statement and less reason for BoE to delay - ING

FXStreet (Guatemala) - James Knightley, analyst at ING Bank explained that the Chancellor Osborne has managed to find an extra £27bn that means less aggressive austerity, less borrowing and more spending with a rather large U-turn thrown in for good measure.

Key Quotes:

"In an upbeat statement to parliament, the UK’s Chancellor of the Exchequer, George Osborne, predicted that UK growth will be stronger than previously thought and government borrowing will be lower, meaning that he has room to allow austerity measures to be relaxed."

With GDP growth revised up a tenth of a percentage point in 2016 and 2017 to 2.4% and 2.5% respectively, stronger tax receipts and lower debt interest costs means that there is a £27bn improvement in the government’s finances. Consequently, the government forecasts that it will need to borrow £8bn less than previously expected while allowing it to spend an extra £12bn on capital investment. It also means that it now needs to cut government spending less aggressively in the next couple of years to reach the Chancellor’s fiscal target of a surplus in 2019/20."

"In this regard the shock announcement was the Chancellor’s U-turn on tax credits. At the last budget statement in July he announced that he was going to restrict them and save £4.5bn. However, this was voted down in the UK’s second chamber, the House of Lords, and the Chancellor promised to listen to representations as to how to deal with the issue, such as phasing the tax changes in to give offsetting support from the introduction of the Living Wage time to be felt. However, given the improvement in the fiscal projections he decided that “the simplest thing to do is not to phase these changes in, but to avoid them altogether”."

As for the borrowing and debt forecasts, we actually see a marginally higher borrowing number for the next two fiscal years at 3.9% of GDP in 2015/16 and 2.5% of GDP in 2016/17 before it improves more rapidly to a surplus in 2019/20 of 0.5% of GDP. As a result, the level of government debt is expected to fall from 82.5% of GDP this year to 74.3% in 2019/20."

Many will question how a £27bn improvement in the government’s fiscal position has been generated from such a marginal increase in the growth forecast, modest changes to the interest rate outlook and the introduction of higher stamp duty on second homes. Irrespective of this, the outcome of more capex and a reversal on the tax credit cuts is a positive for the economic growth story. There had been concern that the incomes of lower earning households could be significantly impacted, which would have been a clear headwind to consumer spending more broadly. As a result, this helps to weaken the argument that fiscal headwinds are a reason for the Bank of England to delay monetary policy tightening until 2017, as the market is currently anticipating."

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