On Wednesday 16 March 2016 the Chancellor George Osborne presented to
Parliament his eighth Budget, his second following the election of a
Conservative majority government in May 2015, together with the Office for
Budget Responsibility’s latest five-year forecasts for the economy and the
public finances and an assessment of the Government’s progress against its
fiscal and welfare spending targets.
Since the November ’15 forecast, four months ago, economic developments have
been disappointing with the outlook for productivity growth and public
finances looking much weaker, making the OBR’s view of UK economic
performance more pessimistic than before.
most significant change is the OBR’s judgement over potential productivity
growth. This combined with historic data and a weaker global outlook means
that the cash size of the UK economy is about 3% smaller at the end of their
forecast than originally predicted.
net effect is for the OBR’s underlying forecast for public sector net
borrowing to be around £11 billion a year worse on average over the next
five years, which would have turned the £10 billion projected surplus of
2019-20 to a £3 billion deficit, extending ‘austerity’ by at least one year
into the life of the next Parliament.
Economic growth slowed in 2015, the slowest annual growth since 2012, while
remaining convincingly within historic norms at 2.2%, down from 2.9% last
year, 2014, while once again underpinned by further increasing consumer
Previous years' GPD growth
Growth since the Crash
February ’16, the Organisation for Economic Co-operation and Development (OECD)
lowered their GDP growth forecasts for most of the world’s largest
growth for 2016 was lowered to 2.1% and this is still forecast to be the
highest in the G7, but only just.
Modest economic growth combined with the continuing strong growth in the
number of people in UK employment means that the productivity statistic fell
sharply in the last quarter.
Stagnating productivity growth
pick-up in actual productivity growth in mid-last year seems now to
have been a false dawn of the UK’s trend productivity growth returning to
pre-crisis levels (historically about 2%).
productivity was (in 2014) 18% below the average of the rest of the ‘G7
countries’, the widest gap since at least 1991.
Although on course to breach the supplementary target to have debt falling
as a share of GDP this year and beyond, and failing to hold spending on
social security below a level capped July 2015, the OBR judges that the
Government should (just) meet its ‘fiscal mandate’ of a budget surplus in
Notably this is by various ‘accounting’ and other measures: decreasing
departmental spending; delaying measures for quarterly corporation tax
payments; and controversially, reducing welfare spending, largely through
tightening the disability benefits system by £1.3 billion annually.
Still Mr Osborne has only just a 50:50 chance of fulfilling this plan to
deliver an annual surplus by the end of this Parliament, according to the
director of the Institute for Fiscal Studies (IFS).
Stock of debt and annual borrowing
The Office for Budget
Responsibility (OBR) published its forecasts for the public finances
alongside the 2016 Budget :
Outlook for economic growth: this looks ‘materially weaker’ than the OBR and
others had expected last November.
Office for Budget Responsibility’s latest five-year forecasts
They have revised real GDP growth down from
an average of 2.4 per cent a year to 2.0 per cent for 2016. The main reason
is data published by the Office for National Statistics (ONS).
November the OBR expected near term strong growth in consumer spending owing
to rising inflation-adjusted household incomes. In part because of
recent wage growth and partly through historically low inflation, at near
Inflation 'near zero' -
core inflation higher
0.3% in February and unchanged it has been below Bank of England target for
26 months in a row
annual growth in average earnings, which over the longer term should
track the growth of productivity, has also weakened sharply, dropping from
near 3% in the first half of 2015, slowing towards the end of the year back
down to just below 2%.
However, the UK’s labour market continues to perform with increasing numbers
employed (74.1%: 31.42 million people), the employment rate is again at an
historic high and the unemployment rate (at 5.1%) back to the pre-downturn
average. The OBR report that the easing of real wage growth may in part
reflect ‘rising job flows into low-skilled occupations’.
Lower productivity growth means lower GDP growth, which then accompanies
lower growth forecasts for labour income, profit growth, consumer spending
and business investment. This, the OBR argues, leads in aggregate, to
significantly reducing tax receipts; the OBR’s rational for its changed view
and judgement on the fiscal outlook.
Long-term real interest rates in the United Kingdom have declined
significantly over the past 35 years (Chart A). The Bank of England believes
that there is evidence that some of that decline has been driven by global
trends such as changing demographic and savings patterns.
Long term rates declining
Interest rate outlook lower than last autumn
Even so, with the lower expectations for productivity and GDP growth, expectation of increasing interest rates have weakened.
markets are suggesting that the Bank of England is not expected to raise
interest rates until 2019 (a full decade after Bank Rate was initially cut
to 0.5 per cent) and even that possibly a cut in rates is more likely that
not in the near term.