In its new economic forecasts, the OBR slashed its forecasts for business investment. It now expects this to grow by just 2.6 per cent this year, compared to 7.4 per cent predicted just three months ago in the Autumn Statement. And it now expects the level of investment in 2019 to be ten per cent lower than it predicted in December. The OBR denies that this is because uncertainty about the EU referendum is depressing investment intentions. Instead, it says it is due to an unexpected drop in capital spending at the end of last year.
Thanks to this, plus weaker export growth as a result of downward revisions to world trade growth, the OBR now expects the real economy in 2018 to be one per cent smaller than it predicted in December. As a result, it expects lower tax revenues and more government borrowing. It now forecasts that public sector net borrowing will be £55.5bn in 2016-17 - £5.6bn higher than it expected three months ago – and £38.8bn in 2017-18, £14bn more than expected three months ago.
Mr Osborne has reacted to the prospect of weaker growth in conventional Keynesian style, by relaxing fiscal policy in the short-term. Overall, the Budget announced a net giveaway of £7.6bn (0.4 per cent of GDP) in 2017-18, mostly because he deferred a plan to make companies to pay corporation tax more quickly but also because a rise in the personal tax allowance will cost the Exchequer £1.7bn then.
However, this loosening will be more than offset by a £13.9bn tightening in 2019-20; this comprises £7bn of cuts in public spending as well as higher corporate taxes. Whether this represents a sensible delaying of tightening until the economy is healthier, or the postponement of tough decisions, is debatable.
Economists warned, however, that even this lacklustre outlook might be too optimistic. James Knightley at ING warns that a vote to leave the EU could “lead to a significant slowdown in economic activity”, which might trigger a loosening of fiscal policy later this year.
