Bulging budget deficit a biggest problem for UK

The coalition government oversaw the halving of the budget deficit to 5% of GDP in its five-year term, but it remains much wider - and debt much higher - than it intended back in 2010. In this report, the second of a three-part series, HSBC examines another one of the UK's three persistent problems: the large budget deficit. 

The new government has a mandate to redouble its efforts: its stated programme envisages 5.2% of GDP worth of tightening, in order to close the deficit by 2018/19. With tax rises essentially off the table, this will mean GBP25bn worth of cuts to departmental and welfare spending, according to the Conservative manifesto. 

We will have a clearer idea of the scope and timing of these cuts when the Stability Budget comes out on 8 July. If the government opts to front-load the tightening, this could weigh on activity more than the cuts implemented by the coalition, particularly if, as it is suspected, the easiest efficiency savings have already been made, and the public have yet to digest fully the extent of the planned cuts. 

The new government will make sweeping cuts to spending in the near term, achieving its goals in full will be a formidable challenge, expects HSBC. Moreover, the assumptions underlying the core scenario could well disappoint. Official forecasts assume uninterrupted growth, continued rapid private sector job creation, low inflation and bond yields, and a pick-up in productivity. Crucially, they also rely on a steady rise in corporate and household borrowing to drive growth as the government borrows less.