The key chart
(Source: OBR; CMMP)
The key message
On Wednesday this week (27 October 2021), the OBR will publish its latest “Economic and fiscal outlook”. Among the 200+ pages of detailed analysis and forecasts, one page and one chart are key – “sectoral net lending” (typically around page 70!). This examines the impact of expected income and expenditure of the three economic sectors (private, public and RoW) for the path of each sector’s net lending to, or borrowing from, the others. A core element of CMMP analysis.
The previous outlook (March 2021) assumed that the two domestic sectors would return to running simultaneous net financial deficits in 2022 and described this situation as “more usual.” Of course, this is only possible if the RoW runs a compensating net financial surplus at the same time (ie current account surplus vis-à-vis the UK).
In short, existing official forecasts assume persistent and significant fiscal and current account deficits between 2022 and 2026. From a CMMP perspective, this is neither usual nor sustainable. Hence our attention will naturally focus on any revisions to these assumptions. Watch this space…
Neither usual, not sustainable
The OBR will publish its “Economic and fiscal outlook” (EFO) for the UK on Wednesday October 2021. The EFO sets out the Office’s forecasts for the economy and the public finances and provides an assessment of whether the Government is likely to achieve its fiscal targets. From a CMMP perspective, the key section is the one page summary of sectoral net lending. Specifically, the impact of expected income and expenditure of different economic sectors for the path of each sector’s net lending to, or borrowing from, the others.
- For background, see “Everyone has one”
In the previous EFO (March 2021), the OBR argued that, “Over the medium term, sectoral lending positions return to more usual levels. As can be seen from the key chart above, this assumed that the two domestic sectors would both be running simultaneous net financial deficits (ie, both spending more than they earn). Note that, in the case of a simple two-sector economy, it would be impossible for the private and public sectors to be running deficits at the same time.
- For background, see “Imbalances and dependencies”
(Source: OBR; CMMP)
Of course, in practice the two domestic sectors are linked economically to foreign FIs, NFCs, HHs and governments, collectively termed the rest-of-the-world (RoW). From this, we can see that the previous OBR forecasts assume that the RoW would run compensating net financial surpluses (current account surpluses) vis-à-vis the UK domestic sectors.
- For background, see “Where is the value…?”
In short, existing forecasts assume significant and persistent fiscal and current account deficits from 2022-2026. From a CMMP perspective, this is neither usual nor sustainable. Hence, our attention will naturally turn to the revised assumptions this week…
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.