9 Jul 2015
UK Budget: Changes to be neutral for BoE monetary policy – RBS
FXStreet (Barcelona) - Ross Walker, Senior UK Economist at RBS, sees no significant front-loading of fiscal tightening in the UK budget, and further expects the budget chances to be neutral for Bank of England’s monetary policy.
Key Quotes
“In terms of the top-down fiscal policy stance, the July 2015 Budget brought little by way of change. The PSNB-ex deficit is reduced at a fractionally faster pace in the first two years (2015-16 & 2016-17 FY) but the subsequent pace of tightening slows to the point where a surplus is projected to be reached a year later than on the March 2015 Budget projections. Whilst there was always some doubt about the preparedness of a Conservative-LibDem coalition to deliver the fiscal tightening set out in the March 2015 Budget, it is clear that the incumbent Conservative-majority administration’s plans are marginally less fiscally hawkish in aggregate.”
“Fiscal policy tightening (as proxied by the projected reduction in the cyclically-adjusted budget deficit) in the 2015-16 FY was increased from 0.5% of GDP in the March Budget to 0.9% of GDP in the July 2015 Budget (in line with our expectations, where we expected a tightening ‘up to 1.0% of GDP’). However, it would be more accurate to depict the change in the fiscal stance over the OBR’s forecast horizon to 2020-21 FY as a smoothing of fiscal tightening: although there is more tightening in the current year, the magnitude of the policy tightening in subsequent years is reduced.”
“Overall, the UK’s fiscal position has not been further tightened in the July 2015 Budget, contrary to our expectations. Does this mean a tighter BoE monetary policy stance is required? Quite possibly over the medium-term but not obviously in the near-term given that the fiscal tightening over the next two years is barely altered. On balance, we suspect the July 2015 Budget changes will be broadly neutral for BoE monetary policy.”
Key Quotes
“In terms of the top-down fiscal policy stance, the July 2015 Budget brought little by way of change. The PSNB-ex deficit is reduced at a fractionally faster pace in the first two years (2015-16 & 2016-17 FY) but the subsequent pace of tightening slows to the point where a surplus is projected to be reached a year later than on the March 2015 Budget projections. Whilst there was always some doubt about the preparedness of a Conservative-LibDem coalition to deliver the fiscal tightening set out in the March 2015 Budget, it is clear that the incumbent Conservative-majority administration’s plans are marginally less fiscally hawkish in aggregate.”
“Fiscal policy tightening (as proxied by the projected reduction in the cyclically-adjusted budget deficit) in the 2015-16 FY was increased from 0.5% of GDP in the March Budget to 0.9% of GDP in the July 2015 Budget (in line with our expectations, where we expected a tightening ‘up to 1.0% of GDP’). However, it would be more accurate to depict the change in the fiscal stance over the OBR’s forecast horizon to 2020-21 FY as a smoothing of fiscal tightening: although there is more tightening in the current year, the magnitude of the policy tightening in subsequent years is reduced.”
“Overall, the UK’s fiscal position has not been further tightened in the July 2015 Budget, contrary to our expectations. Does this mean a tighter BoE monetary policy stance is required? Quite possibly over the medium-term but not obviously in the near-term given that the fiscal tightening over the next two years is barely altered. On balance, we suspect the July 2015 Budget changes will be broadly neutral for BoE monetary policy.”