Autumn Statement: growth down, borrowing up

Today the Office for Budget Responsibility (OBR) has published its latest assessment of the economy and public finances.

They have lowered their forecasts for GDP growth in 2017 and 2018, and increased their estimates of government borrowing.

Here we investigate some of the figures and explain why.

GDP growth in 2017 and 2018 down…

The OBR lowered its forecasts for GDP growth over the next two years compared with its previous March forecasts, as expected. Growth in 2017 was revised down most sharply from 2.2% to 1.4%. 2018 forecasts were also lowered. 2019 and 2020 growth expectations were left unchanged.

obr-lowered-growth-forecasts

 

…due to lower investment and reduced growth in consumer spending

The OBR cited the following reasons for the downgrade:

  • lower investment, due to uncertainty emanating from Brexit negotiations (see chart below), and
  • reduced consumer spending growth, as higher import prices (resulting from the pound’s fall since the referendum) limit purchasing power.

obr-business-invested-growth

 

 

Forecasts for real disposable incomes have been cut

To that end, OBR forecasts for real (inflation-adjusted) incomes per person have been cut sharply following expectations of higher inflation.[1] It is forecast to be only 1.1% higher at the end of this Parliament in Q1 2020 than in Q1 2016; in March they forecast it to be 4.8% higher.

obr-real-disposable-incomes

[1] The measure is real household disposable income per capita (ages 16+)

 

Forecast government borrowing has increased…

The OBR’s forecasts for government borrowing – often referred to as the deficit – have increased. They now forecast higher borrowing in every year to 2021.


as2016

 

..due to Government policy decisions and changes to the underlying forecast

After adjusting for classification changes, differences between the OBR’s forecasts in the Autumn Statement and its March 2016 forecast can be split into two categories: those that result from the OBR updating its underlying forecast – allowing for changes in the economy and public finances – and those that result from policy changes made in the Autumn Statement by the Government.

changes-to-obr-underlying-forecast

The OBR’s underlying forecast has increased borrowing in all years:

  • Lower revenues from taxes are the main factor increasing underlying borrowing: income tax and NICs are highlighted by the OBR as being particularly weak.
  • Increased forecasts for other spending – such as local authority spending and spending on incapacity and disability benefits – also increase the underlying forecast.
  • Reduced forecasts for debt interest payments keep the underlying borrowing forecast lower than it would otherwise have been.

The Government’s policy decisions increase borrowing in every year, but become most significant from 2019/20. A few things are going on here (see OBR’s table 4.37 for more) but two areas are worth drawing attention to:

  • Additional capital spending – around £3.5 billion in 2019/20. The Chancellor’s statement included lots of references to increasing spending on infrastructure, and here is where we see the additional borrowing for some of these projects.
  • Additional welfare spending – around £3 billion in 2019/20 – following the abandonment of disability benefit cuts that were announced in the March Budget, and the decision in this Autumn Statement to taper universal credit awards more slowly.

The Library has published a short summary of the Autumn Statement. The briefing highlights the Government’s key policy decisions and summarises the latest OBR forecasts.

Picture credit: City View, by Rev Stan; Creative Commons Attribution 2.0 Generic (CC by 2.0)