Chancellor Phillip Hammond forecast five more years of weak growth and fiscal austerity this week, even if the UK avoids a no-deal Brexit.
The Office for Budget Responsibility (OBR) forecast that GDP per person will rise by less than 1 per cent per year between 2018 and 2023. That is less than half of the 2.4 per cent rate it grew by in the 50 years to 2007. It believes that Brexit uncertainty is now depressing activity and especially business investment – which it expects to fall again this year – but that an orderly withdrawal later this month will reduce this uncertainty and so stimulate investment and growth later this year.
Even if this happens, however, there are several barriers to growth. One, says the OBR, is that Brexit uncertainty will not vanish, as trading arrangements with the EU have yet to be agreed. "Negotiations on the terms of the UK’s future relationship with the EU have yet to begin in earnest," it said.
Another is that world economic growth is fragile. Although this week’s official figures from the eurozone showed that output recovered in January after December’s slump, it is still well below the autumn’s levels, and purchasing managers are likely to report next week that growth remains very weak.
Also, the OBR foresees only a small recovery in productivity, expecting annual rises of only 1 per cent over the next five years. It is because of this that it foresees wages rising only slightly more than 1 per cent per year in real terms. With the savings ratio not expected to fall any more, this will limit consumer spending growth.
What’s more, fiscal austerity will continue. The OBR foresees cyclically-adjusted net borrowing falling from 1.3 per cent of GDP in 2019-20 to 0.6 per cent by 2022-23.
Despite a still bleak economic outlook, the OBR cut its forecasts for public sector net borrowing by a combined £26.9bn for the next five years. Thanks to this, it foresees the ratio of government debt to GDP falling from 83.3 per cent now to 73 per cent in 2024.
One reason for this is that lower gilt yields are reducing the interest payments on government debt. Also, the OBR expects growth to be more “tax-rich” than it believed last year. Torsten Bell at the Resolution Foundation says this is because top incomes, which pay more tax, are now growing faster.
Even these forecasts, however, are predicated upon a big assumption – that we will leave the EU with a deal. However, John Hawksworth, chief economist at PwC, warns: "If there is a disorderly 'no deal' Brexit, then economic growth and tax revenues are likely to be significantly lower."
