OREANDA-NEWS. The UK budget and latest Office for Budget Responsibility (OBR) projections are in line with Fitch Ratings' view that economic growth will remain robust and fiscal consolidation will continue in the coming years. The UK's fiscal challenge remains substantial relative to most high-rated sovereigns.

This budget's importance is diminished by the fact that the remaining fiscal consolidation will fall to the next parliament, although some announced tax measures are likely to survive a change in government.

No political party appears likely to win an overall majority of parliamentary seats in the 7 May general election and a minority government (rather than a formal coalition) is a distinct possibility. It is therefore likely that the next government will be more constrained in its policymaking.

All major parties have supported the fiscal mandate set out in the Charter for Budget Stability, which aims for a cyclically adjusted current balance in three years' time (currently -2.5% of GDP). The rolling nature of the mandate leaves scope for a future government to ease the pace of fiscal tightening, for example to respond to weaker economic conditions. There is also some ambiguity about how the Charter commitment fits with the opposition Labour party's stated aim to balance the current account "as soon as possible in the next parliament", which implies it could take until 2019-2020.

The latest OBR projections are calculated against the current government's medium-term plans and represent a slight easing in the final year of the next parliament compared with the December 2014 strategy, reaching a cyclically adjusted current surplus of 1.7% of GDP in 2019-2020. But this still represents the fastest pace of consolidation that can realistically be expected from the next government, in our view.

Fiscal institutions in the UK are relatively strong compared with peers, and continuity of the broad deficit-reduction strategy in the next parliament remains our base case. The election makes the pace of consolidation far more uncertain. But the existence of the OBR enhances fiscal transparency and credibility, increasing political incentives to correct budgetary imbalances. Negotiations about the devolution of fiscal responsibility to Scotland will further complicate the fiscal picture, although we do not see this as a major threat to overall UK public finances.

The OBR now expects public sector net debt (PSND) to peak at 80.4% of GDP in 2014-2015, with forecasts for subsequent years revised down by about 1pp compared with the OBR's December projections, due mainly to privatisation receipts. The original "supplementary debt target" set out in 2010 of a falling PSND ratio in 2015-2016 is therefore projected to be met, although this is well within the range of likely forecast error.

The UK's debt and deficit remain high by peer comparison. The UK's general government deficit will be 5.2% of GDP under the internationally comparable EU Treaty definition, and general government gross debt 88.4% of GDP in 2014-2015. This is the highest deficit/GDP ratio and one of the highest debt/GDP ratios among 'AAA' and 'AA+' rated countries.

An upgrade to 'AAA' is unlikely without a lower and steadily declining government debt ratio, assuming it were warranted by other credit factors (see "AAA Sovereign Characteristics and Public Debt Ratios", available at www.fitchratings.com). This is unlikely in the near term, as reflected in the Stable Outlook on the UK's 'AA+' rating.