UK to borrow extra $125bn as growth slows: PwC

London - Britain may borrow £100bn more than previously forecast over the next five years as Brexit hits the economy, according to PricewaterhouseCoopers.

The budget deficit is on course to reach £67bn in the current fiscal year, almost £12bn more than officials estimated in March, it said in a report published on Tuesday. Britain will still have a shortfall of £18bn in 2019 to 2020, the year it was meant to have a £10bn surplus.

The forecasts underscore the constraints facing Chancellor of the Exchequer Philip Hammond as he prepares to make his first major fiscal statement on November 23.

Hammond has hinted at a modest fiscal stimulus, having publicly ditched the budgetary targets of his predecessor George Osborne, and businesses are calling for improved incentives for investment.

The Institute of Directors wants measures such as targeted tax breaks to encourage small and medium-sized companies to invest in productivity-enhancing machinery and equipment, the Telegraph newspaper reported on Tuesday. That echoes calls from the Confederation of British Industry and other industry groups.

Sky News said the chancellor will invest as much £15bn on infrastructure, backing dozens of small-scale projects. Separately, the Financial Times said the Treasury is looking into the possibility of new infrastructure bonds to raise money. Hammond would like to match private investors and pension funds with new transport and energy projects, it said.

PwC said that investment is likely to be the focus for Hammond. Instead of seeking an outright surplus by the end of the decade, he may revive an early Osborne goal of aiming to limit borrowing to the amount needed for public investment while putting the debt ratio on a “clear downward trend,” it said. 

While that could mean an extra £20bn of spending spread over the next three years, Hammond won’t have leeway for a large tax giveaway.

Pragmatic budget

“We expect the chancellor to adopt a pragmatic approach,” said John Hawksworth, chief economist at PwC. Revised fiscal rules will “give him more flexibility to boost planned public investment in priority areas such as housing and transport.”

PwC expects UK economic growth will slow to 1.2% in 2017 as business investment falls and consumers feel the pinch from accelerating inflation following the sharp fall in the pound since the June referendum. It also warned that exports to the European Union could account for as little as 30% of total sales by 2030, compared with 44% currently, should trade barriers be erected.

“We expect Brexit to exert a long, slow drag on growth, rather than giving the economy a short, sharp shock,” Hawksworth said.

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