The Chancellor was handed a challenge in his Budget by the Office for Budget Responsibility in the form of a significant downgrade to the outlook for the UK economy.
The Chancellor was handed a tough challenge in his Budget yesterday by the Office for Budget Responsibility (OBR). Faced with a significant downgrade to the outlook for the UK economy in his first full Autumn Budget, he was left with scarce wiggle room if he wanted to stick to his promise of keeping public spending in check to meet his fiscal targets.
The OBR’s much anticipated revision to forecasts of UK economic growth left the Chancellor with little room to manoeuvre. OBR now expects UK GDP growth to reach only 1.5% this year before slowing further to 1.4% in 2018 and to 1.3% in both 2018 and 2019, subsequently picking up only marginally to 1.5% and 1.6% by 2021 and 2022.
While the forecasts may seem a little pessimistic, Brexit-related challenges might see further deterioration in outlook in the short to medium term. Additionally, further falls in net inward migration, beyond the ONS’s latest projections, would also reduce future long term economic growth. This contrasts with a pick-up in growth prospects elsewhere, with expectations for growth in Eurozone rising to 2.2% in 2017 and to 1.9% in 2018, while in the US they are up to 2.2% in 2017 and 2.5% next year.
The revision to UK growth forecasts was largely due to the disappointing productivity performance since the Great Recession, but other headwinds are also on their way. Brexit has the potential to impose a toll on economic performance and could lead to a bumpier road ahead, which the Chancellor was looking to prepare for by keeping some spare money aside for a rainy day, as well as through £3bn spending on Brexit preparation he allocated over the next two years.
The OBR is now expecting productivity to grow by only 0.9 per cent this year and to gradually rise to 1.2 per cent by 2022, compared to 2.1 per cent a year on average between the early-seventies and the Global Financial Crisis. Given that productivity has barely grown since 2011 this may seem a wise decision, however, neither the Chancellor nor the rest of us should give up on trying harder. After all, stronger productivity growth will raise economic growth and prosperity, and as such is a prize worth aiming for.
The Chancellor offered some additional measures to help boost productivity in the coming years. Measures announced yesterday included increased support for Research & Development, an extra £7bn to extend the National Productivity Investment Fund to 2022-23, £1.7bn for a Transforming Cities Fund to improve local transport connections, as well as just under £150 million to invest in computer science and maths teaching and in a National Retraining Scheme. Some of these measures, however will take some time to feed into the numbers, and no doubt more will need to be spent in areas such as improving basic skills and infrastructure in future Budgets if the UK is to see a significant rise in productivity performance.
The hope is also that other initiatives, for example to improve management quality and to upgrade basic skills through apprenticeships and school-based mentoring programmes, as well as the embedding of new technology more broadly in production processes, will enable higher productivity growth to return to the UK in future.
Housing was among the big winners on the Chancellor’s spending list. Our people in regions such as the South East have called for the prioritisation of further investment in housing supply to prevent the shrinkage of the available labour pool and to enable businesses to attract a suitable local workforce, which is becoming increasingly difficult because of the lack of affordable housing.
The downgrade to UK GDP growth forecasts has overshadowed the generally good news on public finances so far this fiscal year, reducing the money available to the Chancellor. The Chancellor is sticking to his target of reducing public borrowing to less than 2 per cent of national income by 2020-21. Poorer public finances means his emergency chest diminished from £26bn in the March Budget to £14.8bn now, leaving him with less room to act in case the economy requires an additional boost.
In the longer term, however, prospects for the UK economy will depend on the impact Brexit will have on the UK, as well as on the feasibility of productivity recovering. The Chancellor yesterday tried to address both with the limited headroom he had.