MNI INTERVIEW: Ex-OBR's King See Productivity Cut, Loan Boost

The UK’s Office for Budget Responsibility is likely to have to downgrade its productivity forecasts -- widely seen as over-optimistic -- as it starts work on growth assumptions which will form the backdrop for the government’s fiscal calculations in the autumn, Andy King, a partner at Flint Global and a former top OBR official, told MNI.

"Everyone's having to make a judgement about something ... that is uncertain, and if everyone is in the same boat, that's when comparing yourself to others has some value .... If, as the OBR is at the moment, you are near or at the top of the pack, then I think you just want a strong rationale for being there," King said in an interview.

In its Spring Forecast, the OBR factored in a rebound in productivity growth within five years from levels near zero to around 1.25%, roughly halfway between the pre- and post-financial crisis averages, but King noted that the arbitrary nature of this assumption implied "almost having to accept that there isn't a robust way of deciding what productivity growth over the next five years will be.”  (See MNI INTERVIEW: Lower Long Gilt Demand Risks Volatility - Miles)

"The consensus view out there is that they won't find a strong rationale for being an outlier, and therefore they'll need to revise down," he said.

The OBR’s review of its growth projections will go on over the summer and any downwards revision ahead of the Autumn Budget is likely to deliver a significant hit to the public finances.

"You can get to double-digit, billions of pounds of fiscal headroom lost with relatively small revisions to growth rates," King said. (See MNI INTERVIEW: OBR's Productivity Outlook Realistic - Miles)

However, while was downbeat about the productivity outlook, King was encouraged by the Treasury's newfound freedom to lend, having switched its debt target to the Public Sector Net Financial Liabilities (PSNFL) measure, which will permit loans to a raft of new state-backed institutions without endangering its target.

PSNFL LENDING BOOST

In its Autumn 2024 Budget, the new Labour government adopted two new fiscal targets, that the current budget must be in surplus and that debt, defined for the first time on a PSNFL basis, should be falling as a share of GDP by 2029-30.

This spring's "Spending Review was the first time we really saw the Treasury using the flexibility that comes with that target," King said.

"It has no implication for the debt target if you lend more, so long as you expect it to be repaid, and if it's paying interest of gilts or above, then it has no impact on the current budget target either. So it creates an incentive to use lending rather than spending.”

The government has created the National Housing Bank, as well as increased the capacity of the British Business Bank and the Warm Homes Plan, with the Spending Review adding some GBP10 billion of lending and bringing capital spending forwards. (See MNI INTERVIEW: UK To Ease Debt Target, Avoid Net Worth Target)

Some of the lending may even help the public finances, King said.

"The National Housing Bank … should make money for the government. The National Wealth Fund ... is investing in technologies and things that are necessary for the clean energy transition, but it's taking risks," he said.

Boosting lending is unlikely, however, to help with meeting the new NATO target of raising defence spending to 3.5% of GDP, even if loans are made to military suppliers.

 "If they're selling the kit to the Ministry of Defence, ultimately, that's … public spending of a conventional variety that would push against the fiscal targets,” King said.

While the new lending will not count against the new debt target it will still matter for gilts, he noted.

"If the National Wealth Fund lends, ultimately it's gilts that are issued to finance that, but for Public Sector Net Financial Liabilities, the loan scores as an asset. So the net effect is zero, and that's really what this is all about," he said.