Budget to leave economy still facing big fiscal squeeze

As far as the UK is concerned, the main point to take from last week’s Greek developments wasthat there are still limited signs of contagion to the rest of the euro-zone. So far, so not-too-badthen, although we will wait to see how this week’s instalment of the Greek saga goes beforebreathing too big a sigh of relief.

Meanwhile, we expect the Chancellor to smooth the profile of his spending cuts a bit in thisWednesday’s Summer Budget. But the Conservatives have clear political incentives to get austeritywell out of the way before the 2020 election and their room for manoeuvre has also been limited bytheir manifesto pledges, which include eliminating the structural current budget deficit by 2017/18.So the big picture will still be that the economy faces a significant renewed drag from fiscal policy.