OREANDA-NEWS. July 13, 2015 The UK summer budget and latest Office for Budget Responsibility (OBR) projections show that the pace of budget consolidation will be similar to that set out under the previous coalition government, Fitch Ratings says. This is in line with our expectation that the previous budget in March represented the fastest pace of consolidation that could realistically be expected.

Wednesday's budget and OBR projections have smoothed the projected deficit reduction path over the next five years. The headline and cyclically adjusted deficit is expected to be lower this year, due in part to stronger government receipts. From next year, the pace of deficit reduction will be slower than planned in March. Public sector net borrowing (PSNB) is forecast by the OBR to reach a surplus in 2019-2020, one year later than originally planned.

The summer budget has detailed little more than half of the planned GBP37bn discretionary consolidation to 2019-2020. The forthcoming Spending Review due in the autumn will outline further cuts to departmental spending. The budget gives a clearer indication of the government's intentions. About 85% of the discretionary consolidation will fall on expenditure, compared with 50% in the previous parliament.

In our view, this deficit reduction path is credible, not least because much of the fiscal effort is structural and specified upfront. Majority government, an outcome that we did not expect at the time of the previous budget, further supports its credibility. This is due to lower implementation risks than might have arisen under a hung parliament. Also supportive is the existence of an independent fiscal council. The OBR enhances fiscal transparency and increasing political incentives to correct budgetary imbalances.

The fiscal mandate was also revised in the budget. The new deficit rule targets a surplus on PSNB in 2019-2020 and the debt rule requires a falling debt/GDP ratio in each year starting from now until then.

The new deficit rule targets headline borrowing, while the original was based on a cyclically-adjusted measure over a five-year rolling horizon. Arguably the new rule is simpler and more transparent given the uncertainty of measuring the cyclical component. However, some counter-cyclical flexibility could be lost, notwithstanding the carve-out for negative shocks to GDP growth.

The debt rule applies to every year, as opposed to a fixed future date as in the original rule. The deficit rule of the mandate is likely to be harder to meet, while the debt rule could be met over the medium term with a looser fiscal stance. Our debt sustainability analysis indicates public debt/GDP will start to decline when a primary deficit falls below 0.5% of GDP even assuming no future asset sales. This is due to the combination of solid economic growth (nominal GDP growth is assumed to be around 4%) and modest interest expenditure.

The UK's debt and deficit remain high by peer comparison. The UK's general government deficit in 2014-2015 was 5.1% of GDP under the internationally comparable Maastricht definition, and general government gross debt 88.5% of GDP. This is the highest deficit/GDP ratio and one of the highest debt/GDP ratios among 'AAA' and 'AA+' rated countries.