London briefing, Nov. 27

 -Narrowing budget deficit and debt - a challenging task for U.K.

The U.K. budget was announced last week as the country moves ahead to an uncertain path with the Brexit. The U.K. growth forecasts of the Office for Budget Responsibility (OBR) have been cut sharply following revisions to estimates in productivity and business investment. According to OBR’s estimates, the U.K. economy is expected to grow by 1.5 percent this year, down from the estimate in March of 2 percent. Moreover, the country’s growth is expected to slow further down to 1.3 percent by 2020 and then rise by 1.5 percent in 2021, according to estimates. Lower growth is expected to have wider implications in every single sector and household. According to BBC estimates, the lower growth means that by 2021-22 government tax receipts will be £20 billion lower than the OBR's March forecast.

According to the Resolution Foundation research, the U.K. is on course for the longest fall in living standards since records began in the 1950’s. The Resolution Foundation said the downgrade to growth means household disposable income is now set to fall up to 2020. It also found the poorest third is set for an average loss of £715 a year over the coming five years, while the richest third stand to gain £185 on average. This means that households will feel the implication of slow growth to a large extent.

The Guardian quoted Torsten Bell, the director of the Resolution Foundation as saying, “Faced with a grim economic backdrop the chancellor will see this budget as a political success. But that would be cold comfort for Britain’s families given the bleak outlook it paints for their living standards.”

Despite the lower growth, the U.K. budget aims to narrow the debt and the budget deficit.

However, ensuring the medium- to long-term sustainability of the U.K.'s public finances appears more challenging following the November budget and the OBR’s downward revision to its economic growth forecasts, Fitch Ratings says.

The OBR now expects real GDP growth to average 1.4 percent over the four years to 2020, down from 1.8 percent in its March forecasts, before picking up slightly to 1.5 percent in 2021. This would leave the level of real GDP in 2021 around 2 percent lower than the March forecast. The revision is largely due to a weaker productivity assumption, which also means the OBR's assumptions for potential growth has dropped significantly - now averaging 1.4 percent to 2021. Weaker growth makes the reduction of public sector indebtedness more challenging.