Below is the text of the statement made by Philip Hammond, the Chancellor of the Exchequer, in the House of Commons on 18 July 2019.
In accordance with the charter for budget responsibility, the Office for Budget Responsibility (OBR) has today published its second fiscal risks report (FRR). The OBR published its first FRR in 2017, which the Government responded to in 2018 through the managing fiscal risks report (MFR). FRR 2019 fulfils the OBR’s legal obligation to publish a statement setting out the main risks to the public finances at least once every two years. The report features an updated risk assessment of the original issues the OBR raised in FRR 2017, in addition to highlighting new risks to the public finances. It was laid before Parliament earlier today and copies are available in the Vote Office and Printed Paper Office.
The UK is one of the few countries in the world to publish a standalone report on fiscal risks and the FRR is the only such report to be published by an independent agency rather than the Government itself. The UK is a world leader in fiscal risk disclosure and management and is determined to set the global standard not only for the disclosure of fiscal risks but also for the active management of those risks. The IMF’s 2018 article IV consultation noted that “The UK continues to set international standards with respect to fiscal transparency”. This report keeps the UK at the frontier of fiscal management internationally and demonstrates the Government’s commitment to fiscal transparency and accountability. The publication of FRR 2019 further strengthens the cycle of accountability that the first report started. As required under the charter for budget responsibility the Government will respond formally to the FRR 2019 within the next year.
The Government have helped to build a stronger, fairer economy—dealing with the deficit, helping people into work, and cutting taxes for people, families, and businesses. The economy has grown continuously for the past nine years, the employment level is currently at a record high, unemployment is currently at its lowest rate and level since 1975, inflation is at the Bank of England’s target and real wages are rising. We are tackling the productivity challenge head on because it is the only way to sustainably improve living standards in the long term.
The Government have also made substantial progress in improving the health of the public finances since 2010, which have now reached a turning point. The deficit has been reduced by more than four fifths and debt has begun its first sustained fall in a generation. At the spring statement 2019, the OBR confirmed that the Government are forecast to meet both of the interim fiscal rules early, with the structural deficit now below 2% and debt falling in every year of the forecast. The Government have achieved this through a balanced approach to fiscal policy; continuing to reduce debt, while also supporting vital public services, keeping taxes low and investing in Britain’s future.
Within this balanced approach, the Government took the decision to make the NHS the number one spending priority, committing to an historic settlement that provides a cash increase of £33.9 billion a year by 2023-24. This record level of additional funding for our public services has been delivered within a responsible fiscal framework, and has been accompanied by a clear and credible NHS long-term plan, which includes measures to put the NHS back onto a sustainable financial path.
Furthermore, the Government have taken concrete action to reduce a number of risks, which the OBR has acknowledged in FRR 2019. This includes better management of new contingent liabilities, reducing the issuance of index linked gilts and improvements in the management and reporting of legal risks in the welfare system. The Government have also made significant improvements in monitoring and transparency of their fiscal risks, including introducing stricter disclosure requirements for asset sales and revised budgetary treatment for financial transactions.
While the Government have acted, many of the risks discussed by the OBR in its first report remain. In the medium term, the largest potential risks come from the macroeconomy and financial sector in the form of financial crises and major economic downturns. The OBR has also modelled the fiscal implications of the UK leaving the EU without a deal in its fiscal stress test. The stress test is based on the IMF’s less disruptive no-deal scenario. The OBR notes this scenario is not necessarily the most likely outcome and it is relatively benign compared to other possible scenarios (for example, assuming limited short-term border disruptions). The OBR reports that this scenario would add around £30 billion a year to borrowing from 2020-21 onwards and around 12% of GDP to net debt by 2023-24, compared with the OBR’s March forecast baseline.
In the long term, the most significant fiscal risks come from structural economic and societal trends such as lower productivity growth, higher interest rates, changes in consumption and working practice, demographic pressures and technological change. Additionally, the report highlights new risks—such as climate change and the costs associated with measures designed to adapt and mitigate the effects. The risks the OBR has highlighted further reinforce the need for prudent management of the public finances and the reduction of debt to more sustainable levels.