OREANDA-NEWS. The UK's 2016 budget shows that the fixed deadline to eliminate the deficit will increase the risk of relatively sharp fiscal policy adjustments towards the end of the government's term, Fitch Ratings says. But the government currently has some flexibility to spread the response to a changing economic outlook over several years.

The Office for Budget Responsibility (OBR) has reduced its growth forecasts for the next two years by 0.3-0.4pp compared with November's Autumn Statement. The OBR now expects the UK economy to grow at slightly over 2% for the rest of the decade, more in line with Fitch's latest "Global Economic Outlook". The OBR also expects the level of cash GDP over the next two years will be GBP44bn (around 2%) lower than previously assumed.

The government's fiscal mandate for a budget surplus is set to a fixed date - financial year 2019/20, and each year thereafter. Excluding the Budget measures, the OBR's lower GDP expectations would be enough to make the UK government mechanically miss its fiscal target and record a small deficit rather than a balanced budget in 2019/20.

Policy measures announced in the Budget imply a slight fiscal loosening from the previous stance over the next three financial years, of around GBP2bn, or around 0.1% of GDP. All our figures are adjusted for changes in corporation tax payment schedules. The main loosening measures are increases in personal allowances and business rate relief. This near-term loosening illustrates the government's flexibility to smooth multi-year responses to changes in the economic outlook, but as the 2019/20 deadline looms room for manoeuvre may diminish.

Additional policy tightening of around GBP8bn in net terms is pencilled in for 2019/20, including GBP3.5bn in extra departmental spending cuts. This would enable the overall deficit to fall that year, according to OBR forecasts, and the government to meet its fiscal surplus rule. The government has said that the spending cuts in 2019/20 will affect current rather than capital spending, but more specific details will await an efficiency review.

The OBR projections imply that the public sector net debt to GDP ratio will start declining in 2016/17 - one year later than previously assumed, meaning the government will miss its supplementary fiscal target, which aims for this ratio to fall each year.

High public debt, set to peak at close to 90% of GDP (Maastricht gross debt definition), compared with an estimated 'AA' category median of 37%, remains a key weakness for the UK's 'AA+'/Stable sovereign rating, which we affirmed in December.