Jeremy Peat
Goodness knows how many more Budgets Mr Osborne will unveil. By this time next year, in a post-Brexit referendum environment, he could just possibly be sitting in another chair, in or out of Cabinet, under a new Prime Minister. Let us hope not. (Quick clarification - in the sense that a vote for Brexit would, as the Office for Budget Responsibility is now on record as saying, bring ‘disruptive volatility and uncertainty’.)
There were as many political questions to be addressed this time around as economic ones. But this cobbler must stick to his last. In fact the economic content of this year’s Budget was of distinctly greater importance than the political element or indeed the tax adjustments announced. As admitted at the outset, the UK economy may look relatively decent in a global context, but our prospects have suffered a sharp setback since as recently as last year’s Autumn Statement. This deterioration is as much due to domestic factors – namely a belated acceptance that the productivity outlook is really poor – as to the international economic deceleration.
The economic forecasts are prepared by the independent OBR. This allows the Chancellor to set himself at one remove from them. But at the same time the OBR’s independence and credibility makes them of fascination to economy watchers.
The forecasts for GDP growth are lower than in the Autumn Statement for each year from 2016 to 2020. For 2016 the reduction is major, from 2.4% to 2.0%, and from 2018-2020 the forecast is flat at 2.1%. The decline in the OBR’s expectation for productivity growth is the root cause of this decline in forecasts for growth. They now believe productivity growth was only 0.8% last year, as compared to their earlier expectation of 1.1%. For each year up to 2020 the forecast is marked down. They now expect a slower recovery to a lower new ‘trend’ rate.
Two further comments on this topic from the OBR merit repetition. First they are ‘no longer assuming that the pre-crisis historical norms will fully reassert themselves within the forecast horizon’. In other words, even by 2020, 12 years after the great recession, productivity growth will still markedly lag the old normal! Second, their forecast of a 1.8% per annum increase in productivity from 2016 to 2020 compares with an average of 0.8% over the past three years.
The Chancellor quoted the OBR as stating that this part of their forecast was a ‘highly uncertain judgement call’. I agree. However, the Chancellor may have been implying that the OBR might be being over pessimistic. My view is that the risks remain on the downside. There is little evidence out there to demonstrate why UK productivity should suddenly and sharply accelerate. I hope to be proved wrong but if not then UK GDP growth will disappoint again.
This all matters because these economic forecasts lay the foundation for the forecasts of the public finances and hence set the parameters for the Chancellor’s Budget decisions. Mr Osborne has had to accept that he will miss one key target this year. Debt as a percentage of GDP will rise not fall. However he sees this as a ‘blip’ and still forecasts decline in this ratio for the remaining years of the Parliament.
He also maintains his forecast that the annual deficit will disappear from 2019/2020, being transformed into a magnificent surplus, as the deficit vanishes like snow off the proverbial dyke. This looks to be achieved via smoke and mirrors. By then there will be further major but as yet undefined cuts in public expenditure. Interest rates will stay low for longer (because the economy is underperforming), reducing the costs of debt servicing. Then some gains from corporate taxation will flow through – following earlier years when he can claim to have been reducing business taxes.
In sum an inevitable acceptance of a weaker economy but no consequent change in the fiscal strategy.
Jeremy Peat is visiting professor at the University of Strathclyde International Public Policy Institute
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