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Budget 2018: Fiscal loosening boosts risk of two rate hikes next year if ‘no-deal’ avoided

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  • 30/10/2018
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Fiscal loosening may create space for two Monetary Policy Commitee (MPC) rate hikes next year, research has found.

 

Fiscal policy will boost Gross Domestic Product (GDP) growth in 2019 and plans for a renewed tightening thereafter likely will not be maintained, according to the UK economic monitor Pantheon Macroeconomics.

The Office for Budget Responsibility (OBR) now expects year-on-year GDP growth to average 1.5% between 2019 and 2022, up slightly from 1.4% in the Spring Statement.

Delivering the Budget, chancellor Philip Hammond announced that the personal allowance and higher rate thresholds for income tax will rise to £12.5K and £50K, respectively, in April 2019, from £11.9K and £46.4K currently.

On the new plans, fiscal policy now will boost GDP growth modestly next year, adjusted borrowing will be 0.3% of GDP higher in 2019/20 than in 2020/21, the largest increase since 2009, before then falling by 0.3% of GDP in 2020/21.

The report revealed that total government expenditure is set to stabilise at 38% of GDP over the next five years, having fallen every year since its 2010 peak of 45%.

Samuel Tombs, chief UK economist at pantheon Macroeconomics, said that fiscal loosening in the near-term is coming at the cost of getting the debt-to-GDP ratio back down to levels which would enable a future government to drag the economy decisively out of the next downturn.

He added: “Even on yesterday’s plans – which won’t be followed – the ratio will be an uncomfortably high 74% in 2022/23, down from 85% this year.

“Finally, the Chancellor’s largesse will embolden the MPC to step up the pace of interest rate hikes next year. We continue to expect the MPC to raise Bank Rate twice next year – in May and November – provided a no-deal Brexit is avoided.”

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