The Office for Budget Responsibility's spring report shows that Philip Hammond's upbeat statement that there is “light at the end of the tunnel” for the UK economy after years of austerity is based almost entirely on an improved global economy rather than any domestic improvement.
The Chancellor pointed to the OBR's prediction that public sector net debt would start to fall in 2018-19, dropping each year from 85.6% to 77.9% in 2022-23, as a “turning point”. The figures show the UK finally recovering from the impact of the financial crisis, he said, declaring himself “Tigger-like” in a reference to the enthusiastic tiger in Winnie-the-Pooh.
Hammond highlighted a forecast budget deficit of £45.2bn for 2017-18 – £4.7bn lower than predicted by the OBR in November. The OBR also made a slight upgrade to its forecast for GDP growth in 2017-18 to 1.5% from 1.4% in November.
But the OBR said little had changed in the time since its November forecasts, which coincided with Hammond's autumn budget, and that its short-term upgrade to GDP was due to stronger growth in the global economy.
The OBR said: “The economy has slightly more momentum in the near term, thanks to the unexpected strength of the world economy, but there seems little reason to change our view of its medium-term growth potential. And while the budget deficit looks likely to come in almost £5 billion lower this year than we expected in November, the explanations for this imply smaller downward revisions for future years. As a result, the government's headroom against its fiscal targets is virtually unchanged.”
Average GDP growth is expected to be 1.4% a year over the next five years, unchanged since November, the OBR said.
The budget deficit for 2017-18 is expected to be better than forecast in November because tax receipts have been a little stronger than expected. But the downward revision to borrowing since November will diminish over the next two years because of upward revisions to debt interest and some other spending.
“We see much of the improvement in borrowing since November as cyclical, with our forecast for the structural deficit little changed on average and improved by just £0.3bn in the government's target year of 2020-21,” the OBR said.
The OBR said the biggest surprise in the data since November was a pickup in productivity growth but it said this was caused by people working fewer hours rather than producing more or weaker employment growth.
“The fall in average hours over the second half of 2017 is the largest since mid-2011 and second largest since the financial crisis. But in 2011 the fall in hours and associated pick-up in productivity growth proved to be erratic and were soon reversed. We assume for now that the same will be true on this occasion,” the OBR said.
Summing up the OBR's report, Howard Archer, chief economic adviser to the EY Item Club, said: “There was continued caution in the deficit projections … the OBR's forecast implies that the strong gains in the fiscal position – seen so far this year – nearly grind to a halt. There was also little change in borrowing expectations for future years. The chancellor will no doubt be hoping that the economic and fiscal position looks sunnier as the year progresses, enabling him to dispense some giveaways in the Budget.”
While the Chancellor has banked some “fiscal headroom” and hinted that he will use it to increase spending in 2019 and 2020, the government's long-term goal of running a budget surplus by the mid-2020s implies that the austerity programme still has several years left to run, said Samuel Tombs, an economist at Pantheon Macroeconomics.
“In addition, the Chancellor's decision to stick to his previous plans means that the fiscal consolidation will intensify in April, having been mild in 2017. Accordingly, tight fiscal policy will continue to constrain the MPC over the next year.”