UK economy forecast to be smaller than previously expected while 80 per cent of the Autumn Statement borrowing downgrade remains
Despite short term improvements to both growth and borrowing, the Chancellor has been given weaker than expected economic forecasts by the Office for Budget Responsibility, the Resolution Foundation said today in response to the 2017 Spring Budget.
The result is that by 2022 the economy is projected to be £5.3bn smaller than expected at the last Autumn Statement, with pay growth also deteriorating since November and 80 per cent of the Autumn’s post-referendum borrowing downgrade remaining in place.
The combination of stronger short-term growth and healthier tax receipts has reduced borrowing projections by £16.4bn this year (2016-17). But the expected improvements quickly fade over time with the deficit projected to be just £0.4bn lower in 2021-22 than forecast last November, and cumulative borrowing only being £24bn lower by that year. This weaker than hoped ‘Brexit rebate’ means 80 per cent of the OBR’s £122bn downgrade announced at the 2016 Autumn Statement remains in place.
The outlook for family finances also remains challenging, with real pay growth on course to weaken over the coming years. Average earnings are on course to shrink in the second half of 2017 and, by 2021 will be £1,220 a year lower than forecast at the pre-referendum Budget last year. Earnings will still not have returned to pre-crisis levels by 2022. The forecast for 15 for years of lost pay growth illustrates just how stark Britain’s living standards challenge will be over the coming years.
With the UK about to enter a period of considerable economic uncertainty, the Foundation says the Chancellor is right to bank the OBR’s modest borrowing windfall, and instead focus on welcome reforms to bolster the public finances and ensure the tax system catches up with modern working practices. But at a time of considerable pressure on living standards the Chancellor is wrong to press ahead with significant benefit cuts over the coming years.
It adds that most of the revenues generated from raising National Insurance contributions for self-employed workers will be collected from the richest ten per cent of households, with low-earning self-employed workers actually marginally better off as a result of the abolition of Class 2 NICs taking place next year. These tax reforms should be accompanied by improved rights and access to benefits for the self-employed.
Torsten Bell, Director of the Resolution Foundation, said:
“The widely anticipated ‘Brexit rebate’ has turned out to be far weaker than many expected. While in the short-term the economy is looking rosier than the OBR thought back in November, the official forecaster has stuck to their view that the longer-term outlook remains extremely challenging. The Chancellor was right therefore to bank his modest windfall in the face of economic uncertainties.
“While the public finances have improved slightly, the family finances picture has actually darkened since last November. Expectations for lower productivity and pay growth, coupled with rising inflation, mean that average earnings are on course to remain below their pre-crisis levels by 2022 – representing an unprecedented decade and a half of lost pay growth.
“That’s why the Chancellor was wrong not to think again and reverse benefit cuts for low and middle income families that are taking place in the coming years.”
Notes to Editors
- The Resolution Foundation will publish its overnight analysis of Spring Budget 2017 in the early hours of Thursday morning. Please contact the press office if you’d like a copy.