LONDON (Reuters) - Britain will only start to lower public debt as a share of GDP at the end of the decade due to a Brexit-related hit to the economy, a think tank said, underscoring finance minister Philip Hammond's challenge as he prepares his first budget statement.
The Institute for Fiscal Studies predicted Britain would run a budget deficit of nearly 15 billion pounds ($18.6 billion)in the 2019/20 financial year, rather than a surplus of 10 billion pounds as forecast in the government's existing budget projections.
That budget overshoot meant debt as a share of gross domestic product would hover around its current, historically high level of 84 percent until 2019/20 when it would start to fall again, the IFS said.
Finance minister Philip Hammond is expected to announce a much bleaker outlook for the economy and the public finances on Nov. 23 when he makes the country's first budget statement since the June 23 referendum decision to leave the European Union.
He has already signaled he is likely to loosen the purse strings and adopt budget rules that are more flexible than those of his predecessor George Osborne, who last year missed his target to bring down debt as a share of GDP each year.
Thomas Pope, an IFS research economist, said the think tank's deficit forecast might prove too low because it assumed the government would achieve all the tough spending cuts planned by Osborne and did not factor in promised income tax cuts.
"Given the levels of uncertainty (Hammond) might be wise to respond cautiously for now," Pope said in a statement.
"Any new fiscal targets should be reasonably flexible. Any decisions to increase spending or cut taxes in the short run should be taken in the knowledge that significant further austerity after 2020 looks to be on the cards," he said.
The IFS forecast for public finances in 2019/20 included expenditure savings from the end of British contributions to the EU budget and reduced debt servicing costs due to low yields on British government bonds.
(Writing by William Schomberg, editing by Andy Bruce)