UK set for first spending boost to economic growth since the crisis amid Budget downgrade to growth outlook

The new Chancellor Rishi Sunak is set to deliver the first spending boost to economic growth since the crisis in his upcoming Budget, while the OBR is on course to mark down the UK’s GDP outlook by around half a percentage point, according to new analysis published today (Thursday) by the Resolution Foundation.

The Foundation’s inaugural quarterly Macroeconomic Policy Outlook gives a health check on the state of the economy, and how this might affect the task facing Chancellor Sunak as he prepares to deliver his first Budget in under three weeks time.

The report notes that the UK ended 2019 with the joint weakest annual GDP growth (1.1 per cent) in a decade.

And while much of that slowdown has been attributed to weak business investment – which has fallen to its lowest level since the financial crisis – the report shows that weaker consumption has accounted for 60 per cent of the recent growth slowdown. This, says the Foundation, shows that consumer confidence is as crucial as business confidence in getting the UK economy back on track.

But while the UK economy stagnated towards the end of the last decade, recent survey indicators – notably the PMIs in January – have pointed to a brighter start to the new decade. Both of these trends will be on the minds of the OBR as it prepares to deliver its economic outlook for the first time since March 2019.

The Outlook says that with both private-sector economists and the Bank of England marking down their GDP forecasts for 2020 – by 0.5 and 0.7 percentage points (ppts) respectively – since March 2019, an OBR downgrade is on the cards.

Looking at the years ahead the Foundation says that around a half percentage point downgrade to GDP by the end of 2022 in next month’s Budget is likely. Bringing the OBR outlook into line with private economists would mean a 0.3 ppt downgrade by the end of 2022, while bringing it into line with the Bank would mean a 0.6 ppt downgrade. Were the OBR to maintain its growth pessimism relative to the Bank, it would mean a 1.2 ppt reduction to its forecast for GDP.

The Foundation will publish its wider forecast for the public finances in its pre-Budget report next week.

It adds that it is a welcome and timely coincidence that the Budget is set to see the first fiscal boost to the UK economy since the financial crisis.

The Foundation estimates that fiscal policy, including the up to £100bn of new capital spending expected to be announced in the Budget, will boost the economy by up to 1 per cent by end of 2021, offsetting the weaker growth outlook.

Jack Leslie, Economist at the Resolution Foundation, said:

“With just weeks to go until the Budget, the new Chancellor is going to have to contend with a weaker economic outlook than when the government’s official Budget watchdog last reported back in March 2019.

“The Chancellor’s Budget investment plans will, by happy coincidence, help offset the UK’s weak economic outlook. Government spending, including up to £100bn of new investment spending, could boost the size of the economy by up to 1 per cent by the end 2022.

“These short-term developments come against the backdrop of a decade of poor economic performance. Addressing the root cause of weak productivity remains the biggest economic challenge facing the government in the two Budgets this year.”