Full OBR report now out
- The UK economy has slowed this year as households’ real incomes and spending have been squeezed by higher inflation. GDP growth has been a little weaker than we expected in March, but once again we have been more surprised by the strength of employment growth and the corresponding weakness of productivity growth. The persistence of weak productivity growth does not bode well for the UK’s growth potential in the years ahead.
- That said, the public finances have performed better than expected. The ONS has revised borrowing in 2016-17 sharply lower, relative to its initial estimate and our March forecast. And the deficit has continued to fall in the first half of 2017-18. We have revised borrowing down by £8.4 billion to £49.9 billion for the full year, but this is still slightly up on 2016-17 because timing effects boosted receipts last year and will lower them later this year.
- We have lowered our real GDP forecast in every year. We now expect growth to average 1.4 per cent a year over the next five years, slowing a little over the next two (as public spending cuts and Brexit-related uncertainty weigh on the economy) and picking up modestly thereafter as productivity growth quickens. The main reason for lowering our GDP forecast since March is a significant downward revision to potential productivity growth, reflecting a reassessment of the post-crisis weakness and the hypotheses to explain it.
- The combined effects of a better fiscal position now, but weaker prospects looking forward, have led us to revise up our forecast for the budget deficit by increasing amounts over the next five years, even before accounting for the Budget measures. In the Government’s fiscal target year of 2020-21, our underlying upward forecast revision of £13.7 billion absorbed roughly half the headroom against the ‘fiscal mandate’ shown in our March forecast.
- Faced with a weaker outlook for the economy and the public finances, and growing pressures on public services following years of cuts, the Government has chosen to deliver a significant near-term fiscal giveaway. This adds £2.7 billion to borrowing next year and a larger £9.2 billion (0.4 per cent of GDP) in 2019-20. The package includes net tax cuts (to fuel duty, inevitably, and stamp duty for first-time buyers), a significant easing in previously planned cuts to current departmental spending and a boost to capital spending. Together they provide a modest boost to GDP growth in the years we expected it to be weakest. Consistent with the pattern of many past fiscal events, the policy easing is then scaled back in future years, with a small fiscal tightening ultimately pencilled in for 2022-23 in the form of further cuts in public services spending as a share of GDP.
Full summary here. Nov17ExecSum