Monday 26 September 2016

Pressure on UK to park austerity amid recession fear

Deborah L Hyde and Emma Charlton

Published 04/08/2016 | 02:30

UK Chancellor Philip Hammond
UK Chancellor Philip Hammond

UK Chancellor Philip Hammond is under pressure to deliver on his commitment to "reset" fiscal policy if the UK is to avoid a deep recession.

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Six years of austerity are being reviewed by Prime Minister Theresa May's government amid signs the decision to quit the European Union is propelling the economy toward its first contraction since 2009.

Warnings are also mounting that the Bank of England cannot revive growth alone as policy makers prepare to deliver new monetary aid later today.

But with their benchmark interest rate already near zero and doubts over the potency of buying more bonds, there may be limits to what Governor Mark Carney and his colleagues can achieve, according to economists and former BoE officials.

"The bank is in a much more constrained position in a world where monetary policy is likely to be less effective," Charles Bean, who was deputy governor for monetary policy until 2014, said at a Fathom Consulting conference in London on Tuesday.

"The outlook for the economy beyond the next quarter or two depends on what the government does," said Robert Wood, a London-based economist at Bank of America Merrill Lynch who once worked at the UK central bank. "The right response is for the government to add fiscal stimulus, but obviously we don't know what they're planning."

Ms May's three-week-old administration has signalled it is ready to loosen the purse strings, saying it is no longer seeking to deliver a budget surplus by the 2020 and pledging to take whatever action is necessary to aid the economy.

But Mr Hammond says nothing will be revealed until the Autumn Statement this year, a rejection of predecessor George Osborne's claim that an emergency budget would be required to repair the public finances if Britons voted for Brexit.

Options include further cutting tax on corporate profits, reducing VAT on sales, subjecting less income to tax, allowing companies to make more spending tax-deductible and boosting investment in infrastructure.

Economists say the new chancellor has room to deliver a fiscal boost without alarming investors because the cost of borrowing has fallen since the June 23 Brexit vote, with the 10-year gilt yield reaching a record-low 0.681pc last month.

Capital Economics says stimulus of around £5bn a year is likely. The budget deficit will total £129bn over the two fiscal years through March 2018, more than a third more than the Office for Budget Responsibility forecast in March, according to the average of independent forecasts received by the Treasury in July. Economists polled by Bloomberg see output shrinking this quarter and next, with growth slowing to just 0.6pc next year.

A shift to easing would mark a departure from the David Cameron era, when George Osborne betted on austerity to aid the economy. He deployed the biggest fiscal retrenchment since World War II, reining in a budget deficit from 10pc of GDP, yet drawing blame in some quarters for fuelling the discontent that led to the referendum result. (Bloomberg)

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