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We expect emerging market government debt over the medium term to prompt long-term UK governments (rated according to Scope Ratings AA/Stable Outlook) to raise taxes, unless there is a sustained improvement in the outlook for expansion. Economic output is expected to grow by as much as 0. 6% this year and slow to 0. 4% in 2024 before returning to the UK’s prospective expansion of around 1. 5% in 2025.
The UK government’s gross debt share as a percentage of GDP stood at 101% in 2022, below that of comparable countries such as France (AA rating/negative outlook), 112%, and Belgium (AA-/negative outlook), 105%. . However, given the development spending pressures, the flexible fiscal framework, and the limited fiscal space retained by the current Chancellor compared to his predecessors, we expect debt to gradually accumulate to 110% by 2028, which corresponds to France.
Current spending plans mean significant relief in net public sector indebtedness between 2023-24 and 2028-29, from 4. 5% of GDP to 1. 1% (Chart 1). It would be the lowest deficit in more than twenty years and particularly lower than the five years before the Covid pandemic, around 3%. This drop would be largely due to an increase in tax benefits (-1. 0% of GDP), a relief in departmental spending (-1. 1% of GDP) and an interest relief (-0. 5% of GDP).
The overtly positive detail is the projected real decrease in departmental spending. Public sector productivity remains at around 5% at pre-pandemic levels and long-term spending revisions are expected to lead to higher spending in key spaces such as fitness and social care, education and advocacy. and transportation. The government has not detailed the final priorities over the entire forecast horizon, which will need to be agreed after the next general election, scheduled before the end of January 2025 and likely to be adopted next autumn.
Table 1: Spending plans mean strong relief in public sector debt
Net public sector indebtedness, as a percentage of GDP
Combined with the existing fiscal framework, this casts doubt on the UK’s ability to meet the debt-to-GDP trajectory set out through the Office for Budget Responsibility, and it appears that the government continues to meet its fiscal targets.
The framework has been amended six times since 2011, as there is no constitutional anchor requiring all parties to approve significant changes. The most recent change, in January 2023, brought less restrictive tax rules. The goal is that net debt as a percentage of GDP will decline through the fifth year over a five-year rolling forecast horizon, rather than the past three-year horizon. The public sector net debt target is less than 3% of GDP over the same period. In principle, the evolutionary nature of the targets is such that they can be achieved even if public sector net debt and net borrowing accumulate indefinitely.
High inflation pushed more people into the tax brackets of higher sources of earnings, leading to an increase in the tax burden and tax gains for the government. The government has to use the resulting additional margin to implement tax cuts. , adding corporate tax cuts, to inspire personal investment.
Despite this, the overall tax burden is still expected to reach record levels, expanding by around five percentage points of GDP over the next two decades (Chart 2).
However, compared to other major European economies, the UK’s tax burden remains low, leaving room for further fiscal consolidation, with tax revenues as a percentage of GDP of 37. 9% in 2022, compared to 38. 3% in Spain and 38. 3% in Germany. (42. 1%), Italy (42. 9%) and France (47. 6%), although they are particularly higher than the US. (27,5%).
Figure 2: The UK’s tax burden remains lower than many major European states.
Total tax burden, adding social contributions and public benefit as a percentage of GDP
While previous governments have raised taxes through the expansion of national insurance or value-added tax, long-term governments would possibly consider other tactics for taxing wealth in addition to income. Without higher taxes and stronger economic growth, the country will most likely face either a continued deterioration of public facilities and social benefits, or larger budget deficits.
For a review of all of today’s economic events, check out our economic calendar.
Eiko Sievert is Head of Public and Sovereign Sector Ratings at Scope Ratings GmbH.
This article originally published on FX Empire
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