Philip Hammond could be on track to overshoot previous public borrowing forecasts by £100bn in total by 2021, a report out today has warned.
PwC also found that, if the new chancellor opts to keep the status quo on spending despite June's referendum result, this year's public sector net borrowing will come in at £67bn, around £10bn above the Office for Budget Responsibility's (OBR) forecast carried out before the UK voted for Brexit.
The study also predicted that, in 2019-20, the country would still be borrowing a net £18bn, as opposed to the surplus forecast by the OBR.
However, the study stressed the figures were not as bleak as they seemed at first glance. Even if public borrowing does overrun, the chancellor is likely to spend the money bolstering high priority areas of public investment, such as housing, transport infrastructure and the NHS, and there is likely to be a current budget surplus by the end of this parliament.
"Clearly borrowing will be higher than expected but it's not disastrous," John Hawksworth, chief economist at PwC, told City A.M. "The deficit would still be on a downward profile and we think there's still room for increased investment on certain key priorities...It's reasonable for him [Hammond] to want to support the economy over the next two or three years on the fiscal side for increased public investment because business investment is likely to weaken somewhat due to the political and economical uncertainty around the Brexit negotiations."
The report also predicted that, while GDP growth could slow down to around 1.2 per cent in 2017, the UK is likely to dodge a recession, particularly as key indicators like consumer spending have held up better than expected post-Brexit vote.
PwC predicted UK GDP growth for 2016 would be two per cent, which could still be the highest pace among the G7.
The professional services firm also does not fear Brexit's impact on trading in the long run, pointing out that the country's ability to trade with non-EU regions had been growing since about 2007 and the increasing focus on emerging markets meant trade with EU countries would have been likely to fall regardless of the Brexit vote.
Hawksworth added: "You can see many business using this [the uncertainty on what access the UK will retain to the Single Market following Brexit] as a stimulus to rethink their strategies, to look further asea...I think there will be some strategic shift there and this has been a jolt to business to look more widely than just to the European markets."
Inflation, however, could throw a spanner in the works, with PwC predicting it could rise to 2.7 per cent by the end of 2017, as the weaker pound funnels through to consumers and places a squeeze on their spending power.
A Treasury spokesperson said:
The fundamentals of the UK economy are strong and we are well-placed to deal with the challenges and take advantage of opportunities ahead. The chancellor has been clear that we will return the budget to balance in a way that allows us the space to support the economy as needed.