Can the UK deliver growth without worsening its fiscal position?

UBS economist Dean Turner expressed skepticism that UK Prime Minister Andy Burnham's plan to modify the "pension triple lock" would sufficiently alleviate pressure on public finances or restore the government's dwindling fiscal flexibility. Turner questioned whether the government's growth objectives could be realized without exacerbating an already challenging fiscal situation, as markets began to doubt the feasibility of such ambitions.

Burnham, the first leader in recent times to indicate a willingness to address spending, also promised adherence to fiscal rules, keeping the prospect of tax increases in the spotlight. Turner predicted the Chancellor would utilize some of the available fiscal room instead of immediately rebuilding it through tax hikes, emphasizing that fiscal buffers are meant for tough times and that energy markets remain unusually volatile.

He argued that raising taxes could weigh on investment and hinder the UK's longer-term growth prospects. Burnham's suggestion for enhanced public control over critical services might also dissuade private investment, as increased regulatory uncertainty could deter both domestic and foreign capital inflows, potentially placing more of the investment burden on the already strained public sector.

On Brexit, Turner indicated that a UK rejoining the European Union was unlikely, but closer cooperation with the bloc might accelerate, especially with negotiations slated for December. While research suggests Brexit may have reduced UK GDP by 6%-8% over the past decade, Turner cautioned that quantifying the economic impact of the 2016 referendum remains challenging.

He noted that rejoining the EU would not necessarily erase those losses, as the UK might have to relinquish some of the advantages it previously enjoyed, such as its budget rebate and opt-out from the single currency. Despite potential benefits from reducing trade barriers with the EU, Turner stressed that such measures alone would not suffice to resolve the UK's broader growth challenges.

Burnham's continuous advocacy for major reforms beyond the next election suggests these changes would not materialize until at least 2030, contingent on the government obtaining a second term with sufficient parliamentary backing. In the meantime, fiscal credibility remains one of the government's most crucial tools, Turner emphasized.

A Budget that convinces investors of the government's commitment to fiscal discipline could potentially turn the recent surge in gilt yields into an attractive proposition, rather than a cause for concern.