Fiscal risks report – July 2019

pdf

Fiscal risks report – July 2019

July 18, 2019 – 2.83 MB
For a quick summary, read the overview

 

Commissioned by Parliament in 2015, the report identifies and analyses risks to the medium term outlook for the public finances and to long-term fiscal sustainability. It covers a wide range of topics including:

  • macroeconomic and financial sector risks (Chapters 2 and 3)
  • specific revenue and spending risks (Chapters 4 and 5)
  • balance sheet and debt interest risks (Chapters 6 and 7)
  • policy risks to the public finances, including the Government’s weakening commitment to its legislated balanced budget objective (Chapter 8)
  • for the first time, how we might analyse possible risks to the public finances from climate change (Chapter 9)
  • a fiscal ‘stress test’ where we illustrate the fiscal effects of the International Monetary Fund’s ‘No-deal Brexit Scenario A’, which was published in the April 2019 World economic outlook, Scenario Box 1.1. (Chapter 10)

HM Treasury are legally committed to respond to our Fiscal risks report as outlined in the Charter for Budget Responsibility.

Supporting documents

Supplementary documents

Information or data which has been released as a result of external requests, since the original publication of the main document.

Presentations

Boxes

Within each of our key publications we include topical ‘boxes’. These self-contained analyses are unique to this publication and tend to cover recent developments in the economy or public finances that complement the main discussion of our analyses.

Developments in fiscal risk management since our previous report

Between our 2017 FRR and our 2019 FRR the Government undertook a number of initiatives to deepen its risk management. This box summarised these changes.

Is the UK entering recession?

Is the UK entering recession?
Monthly output data and the PMIs weakened in the second quarter of 2019, leading some commentators to suggest GDP would fall. This box considered what was behind the weaker data and whether it would persist into the third quarter, leading to a technical recession.

How much might it cost to means-test free TV licences for the over 75s?

In June 2019 the BBC announced its decision to begin means-testing eligibility for Free TV licences for those aged 75 and over, based on households containing someone aged 75 or over and also claiming pension credit. This box explores the impact the BBC’s policy could have on pension credit take-up and welfare spending.

The rise in ‘prudential’ borrowing – the Spelthorne example

In recent years, local authorities have increased their 'prudential' borrowing to take advantage of the low interest rates offered by the Public Loans Work Board. In this box we discussed the example of Spelthorne Borough Council, looking at some of its riskier investments in commercial property and how those may pose a risk to the public finances in the event of an economic downturn.

Housing associations, classification changes and fiscal risks

Housing associations, classification changes and fiscal risks
Where the Government uses off-balance sheet financing to deliver public services this results in a 'fiscal illusion', where the recorded measures of debt and deficit do not reflect economic reality. In this box we looked at the case of housing associations (HAs). These came onto the balance sheet after the Government was given significant controls over them. The Government then legislated just enough to move HAs off-balance sheet. Neither movement made any fundamental change to fiscal sustainability.

Accounting treatment and policy developments affecting student loans

The accounting treatment for student loans changed dramatically in 2019 adding more than £10 billion to the deficit. This box summarised the history of this change and a review into the design of post-18 education financing.

How a change to the RPI would affect our fiscal forecasts

By issuing gilts linked to the Retail Prices Index (RPI) the Government exposes itself to inflation risks on interest payments. In this box, we looked at how changes to the formula for calculating RPI would affect our forecast.

The UK Government’s Climate Change Risk Assessment

The 2008 Climate Change Act requires the Government to assess the risks from climate change every five years. In this box, we looked at the most recent assessment published in 2017 and linked the six priority risk areas to how they are fiscal risks.

Case study: US federal government on climate-related fiscal risks

In 2016, the Office of Management and Budget and President Obama’s Council of Economic Advisors produced a preliminary assessment of some of the fiscal risks associated with climate change. In this box, we describe the estimated potential costs of these fiscal risks, which could affect both expenditure and revenue.

Climate-related scenario analysis: the NGFS approach

Climate-related scenario analysis: the NGFS approach
In April 2019, the Network for Greening the Financial System (NGFS) issued a ‘call for action’ that sets out the next steps for assessing climate-related risks to financial stability. In this box, we looked at the scenario framework used by the NGFS, and the Green Finance Strategy – in which the UK Government set out how it will ensure the management of climate-related financial risks.

Customs duties in a no-deal Brexit

Customs duties in a no-deal Brexit
In the event of a 'no-deal' Brexit, the UK would be able to apply its own external tariff to goods imported. In this box, we explored the impacts of customs duties on borrowing, what a preliminary estimate of potential revenues would be and what else we would need to consider if this were to be our central forecast.