• Home
  • About
  • Subscribe
  • LATIF
  • Conferences
  • Dashboard
  • Edit My Profile
  • Log In
  • Logout
  • Register
  • Edit this post

Room 151

  • 151 BRIEF

    What's New?

  • Slough welcomes commitment that Office for Local Government ‘will not be a burden’

    June 30, 2022

  • Homes England agrees strategic partnership with two authorities

    June 29, 2022

  • Soaring inflation and pay pressures to add £3.6bn to council budgets

    June 28, 2022

  • Underfunded social care reforms could ‘exacerbate workforce pressures’

    June 27, 2022

  • Nottingham City Council leader labels proposed intervention as ‘disappointing’

    June 27, 2022

  • Government preparing to intervene in Nottingham City Council

    June 23, 2022

  • Treasury
  • Technical
  • Funding
  • Resources
  • LGPS
  • Development
  • 151 News
  • Blogs
    • David Green
    • Agent 151
    • Dan Bates
    • Richard Harbord
    • Stephen Sheen
    • James Bevan
    • Steve Bishop
    • Cllr John Clancy
    • David Crum
    • Graham Liddell
    • Ian O’Donnell
    • Jackie Shute
  • Interviews
  • Briefs

OBR Forecast to Signal Increase in Bond Issuance

0
  • by James Bevan
  • in Blogs · James Bevan · Recent Posts
  • — 11 Nov, 2011

With the Bank of England steadily implementing its asset purchase programme, markets may shift their focus in the UK towards fiscal policy and, in particular, the new set of forecasts from the Office for Budget Responsibility(OBR) that will be published alongside the Chancellor’s autumn statement on 29 November. There are several interesting issues that will be addressed:

– Given the weaker prospects for growth, what the OBR’s new forecasts for the deficit in this and coming years will be;

– What the implications are for this year’s gilt issuance; and

– Whether that has led to a change in the OBR’s estimate of the structural deficit, implying that the government may have to impose further fiscal tightening in coming years.

– The government has also announced it will announce “credit easing” measures at the autumn statement.

There has been considerable focus on the potential for a revision to the OBR’s estimate of the structural deficit, which in large part would reflect changed assumptions about the amount of spare capacity in the economy. Although some change is likely – the economy now looks to have been well above potential before the recession, for example – the immediate impact of any change in this estimate may be more political than economic, as it would imply that there may be a need for further tightening in a few years’ time.

For markets, it may be that the key issue will be the revisions to the deficit for this and the coming few years. Back in March, the OBR forecast that public sector net borrowing would be £122bn (8% of GDP) in 2011-12, on the back of 1.7% GDP growth this year. With growth strengthening further next year (to 2.5%), the deficit was expected to shrink further, down to 2.5% of GDP by 2014-15.

Since March, of course, the prospect for growth has deteriorated. Given continued uncertainty over the Euroland debt crisis, a sharp and immediate recovery is unlikely. As such, the OBR’s growth forecasts are likely to be revised downwards. In turn, that should lead to higher deficit forecasts. Using simple rules of thumb for the impact of weaker growth on the public finances, the deficit should be revised up to 8.3%
of GDP in 2011/12 & 7.2% of GDP in 2012/13.

Although such a weaker growth profile suggests a higher deficit for this year, it is interesting to note that in the first half of the year net borrowing has continued its downward trend, and given the OBR’s tendency to be conservative, we could expect a deficit forecast of around £130bn (8.5% of GDP).

The fact that the public finances are performing so well given the weakness in the real economy indicates that the structural fall in the deficit is likely to be at least as large as planned. Indeed, given that the risks to the growth forecasts are likely to be the downside while the chances are that the deficit could end up slightly smaller than £130bn, it appears that the structural fiscal tightening this year should be considerable. And as such, the deficit may actually shrink faster than the OBR is likely to project.

A higher deficit forecast for 2011-12 will, of course, have implications for issuance and we may see gilt issuance for 2011-12 to rise by £10bn, to £177bn. We would expect that increase to be split between mediums and longs.

One issue that may affect issuance is the impact of any “credit easing” announcement by the government. Given Chancellor Osborne’s comment in his letter to Governor King that the government would make
interventions that should “complement the MPC’s asset purchases”, the scope of any credit easing could be substantial and there may be several aspects to any such policy. Thus, the government may attempt to set up a financing vehicle for small and medium-sized firms, potentially by buying and securitising loans to
those firms.

As that is unlikely to have an instantaneous effect, the government may choose to improve credit conditions more generally by financing the direct purchase of credit issued by firms. Indeed, we wouldn’t be surprised if the government were to announce the direct purchase of bank credit. It’s possible that the proposed scale of these purchases could be around £50bn. We would expect them to be financed by the issuance of bills.

James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla

Image courtesy of www.London-GB.com

Share

You may also like...

  • Extra finance promised by the government receives a broad welcome 12th Jan, 2021
  • Andrew Hardingham: Holidays await but the ‘in’ box is brimming over 17th Aug, 2021
  • Prudential Code: Are financial investments a case of ‘mistaken identity’? 21st Oct, 2021
  • Ryan Boothroyd: Post-covid world holds opportunity for long-term LGPS investors 28th Apr, 2021

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • 151 BRIEFS – WHAT’s NEW?

    • Homes England agrees strategic partnership with two authorities
    • Soaring inflation and pay pressures to add £3.6bn to council budgets
    • Underfunded social care reforms could ‘exacerbate workforce pressures’
    • Nottingham City Council leader labels proposed intervention as ‘disappointing’
    • Government preparing to intervene in Nottingham City Council
  • Room151’s LGPS Roundtables

    Biodiversity
    Valuations & Risk
    LGPS Women

  • Room151’s LGPS Roundtables

    Biodiversity
    LGPS Women
    Valuations & Risk
  • Latest tweets

    Room151 16 hours ago

    Hillier confirmed as keynote speaker for LATIF/FDs’ Summit: Dame Meg Hillier, chair of the Public Accounts Committee, has been confirmed as a keynote speaker for Room151’s combined Local Authority Treasurers Investment Forum (LATIF) and FDs Summit. The… dlvr.it/ST70F7 pic.twitter.com/hxV676Iley

    Room151 16 hours ago

    Councils’ funding at risk due to ‘undercounting’ in census data: Population estimates in London and Manchester may have been significantly underestimated in the 2021 census potentially threatening government funding for frontline services in these… dlvr.it/ST707J pic.twitter.com/VncIyaXa01

    Room151 3 days ago

    Gove at LGA: councils to receive two-year financial settlement: Michael Gove has announced that councils will receive a two-year financial settlement from next year to provide authorities with “financial certainty” and allow them to plan ahead. The… dlvr.it/ST0kSV pic.twitter.com/wxL3UM4sGO

    Room151 3 days ago

    LGPS valuations: the digital journey: Rob Bilton explains how technology is helping to deliver one of the most complex data exercises in the world of public sector pensions. The 2022 valuations for LGPS funds in[...] dlvr.it/ST0kMq pic.twitter.com/VxjSPC2Uvo

    Room151 7 days ago

    Conrad Hall: ‘more sophisticated’ regulation needed for local government: The chair of the CIPFA/LASAAC Code Board has questioned the sophistication of financial regulation in local government and the continuing focus of the Department for Levelling Up,… dlvr.it/SSnPBV pic.twitter.com/G5d7JCWF8c

    Room151 1 week ago

    Slough Council approves plans to restructure finance department: Slough Borough Council has approved plans to restructure its finance department to enhance capacity and capability and to address a “significant weakness” in the function. The local… dlvr.it/SSf8DG pic.twitter.com/l5lmyHmkBg

  • Register to become a Room151 user

  • Previous story LOBOs, Fiascos & Liquidity Management
  • Next story Money Funds Slow Eurozone Reductions in October Says JPMorgan

© Copyright 2022 Room 151. Typegrid Theme by WPBandit.

0 shares