(Bloomberg) -- Britain will see billions piled onto its budget deficit this week as it accepts the real cost of student loans to the public purse.
The move is expected to add more than 11 billion pounds ($14 billion) to a deficit that is already rising much more quickly than forecast this year. The increase will make it all-but impossible for Chancellor of the Exchequer Sajid Javid to deliver on his promise to end austerity next year without breaking the key fiscal rule introduced by his predecessor Philip Hammond.
In reality, Javid’s room for maneuver was already limited, with the economy losing momentum ahead of Brexit and government borrowing on course to significantly overshoot forecasts this year. A no-deal departure from the European Union would almost certainly put another dent in the public finances.
Existing fiscal rules require structural borrowing to be less than 2% of GDP in 2020-21. The deficit including student loans was forecast to come in 15 billion pounds below the ceiling but Javid used up most of that “headroom” this month when he unveiled the biggest spending spree for 15 years.
What Bloomberg’s Economists Say:
“The combination of a more generous spending round, reclassification of student loans and structural weakness in the in-year borrowing data has pushed the current fiscal mandate out of reach. And that’s before taking account of Boris Johnson’s pledges to cut taxes and the possibility the U.K. leaves the EU without a deal.”
--Dan Hanson, Economist
The new treatment of student debt acknowledges the fact that a significant proportion will never be repaid. Loans destined to be written off will be counted as spending instead, ending what has been described as a “fiscal illusion” that conceals the true cost to the taxpayer of the 120 billion pounds now outstanding.
The reclassification will add 11.6 billion pounds to the deficit in the next fiscal year, according to the Office for Budget Responsibility. There are no implications for government-bond issuance, however, since actual cash flows remain unchanged. Overall government debt is also unaffected.
Breaching the deficit limit may be an embarrassment for the newly appointed chancellor, who has said his spending commitments are consistent with the rules.
However, Javid has left little doubt that a re-elected Conservative government would follow the U.S. and loosen fiscal policy beyond 2021. He has signaled a major boost for infrastructure is on the way and said he’ll review the existing fiscal framework in time for the Autumn Budget.
“The government’s fiscal target is dead in the water,” said Andrew Wishart at Capital Economics in London. “But this shouldn’t cause investors to take fright or prevent the chancellor from supporting the economy however Brexit turns out.”
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