UBS | The focus in the Brexit debate is often on the UK’s relatively large current account deficit. This is understandable, as a period in which Foreign Direct Investment was harder for the UK to attract in a post-Brexit world would likely imply the current account would need to correct.
Twin deficits pose some risks for the UK domestic private sector
But the UK also has a ‘twin deficit’ problem. The public sector is also running a large budget deficit. From an accounting perspective, if lending from abroad is harder to attain, then more of a given public sector deficit may need to be fun ded from the UK domestic private sector. This raises the risks that private sector investment will need to fall, so that the corporate sector increases its net saving. Even if the household sector consumes less, this would still have consequences for UK growth in the event of a Brexit.
We expect the DMO to sell more gilts in 2016/17 than in 2015/16
The UK Budget next week (16 th) will provide an updated forecast from the Debt Management Office (DMO) of the UK’s gilt issuance in 2016/17. Slower nominal GDP gr owth, an overshoot in the deficit in 2015/16 and other factors mean that we expect the forecast amount of Gilt issuance for 2016/17 of £142bn, almost £15bn higher than in 2015/16. So the demands from the public sector for funding look set to remain high, underlining some of the vulnerabilities going into the EU referendum.