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Watchdog warns 'bumpy' Brexit could mean rougher times for UK economy

Published 23/11/2016

Philip Hammond said he would publish a draft Charter for Budget Responsibility demanding the public finances are back in the black 'as early as possible' in the next Parliament
Philip Hammond said he would publish a draft Charter for Budget Responsibility demanding the public finances are back in the black 'as early as possible' in the next Parliament

Britain's fiscal watchdog has warned the UK economy could endure a rougher ride than its forecasts suggest if the road to Brexit is "bumpy".

The Office for Budget Responsibility (OBR) said its outlook for economic growth does not factor in choppier conditions caused by a more difficult exit from the European Union, which may force consumers to spend less money or businesses to roll out deeper job cuts.

In its forecast released with the Autumn Statement, the OBR stated: " In the near term, as the negotiations get under way, we assume that GDP growth will continue to slow into next year as uncertainty leads firms to delay investment and as consumers are squeezed by higher import prices, thanks to the fall in the pound.

"But we do not assume that firms shed jobs more aggressively or that consumers increase precautionary saving, both of which are downside risks if the path to Brexit is bumpy."

Its comments came as Chancellor Philip Hammond laid bare the economic gloom facing the nation, with forecasts revealing sweeping downgrades to UK growth and a sharp rise in Government borrowing.

In its latest independent forecasts since March, the OBR upgraded its outlook for UK gross domestic product (GDP) from 2% to 2.1% for this year.

But it slashed its outlook from 2.2% to 1.4% for 2017 and from 2.1% to 1.7% in 2018, as it expects lower investment and a drop in consumer spending to apply the brakes to the UK economy.

The OBR maintained its outlook of 2.1% growth in 2019 and 2020, but said GDP growth would slip to 2% in 2021.

Despite abandoning his predecessor's plans to balance the books by 2020, the Chancellor announced that the Government would put the public finances back in the black "as early as possible" in the next Parliament as part of a new draft Charter for Budget Responsibility.

OBR chairman Robert Chote said this would prove "quite a challenge" for the Chancellor if he needs to borrow more during this Parliament.

He said the Government would also face mounting pressure post-2020 to increase aid spending for an ageing population, while the number of people set to receive the state pension could rise by around 9% in the next Parliament.

On the public finances, the OBR forecast the Chancellor to overshoot previous targets for public sector borrowing for this year, revising its outlook from £55.5 billion to £68.2 billion for 2016/17.

It also hiked forecasts from £38.8 billion to £59 billion for 2017/18, from £21.4 billion to £46.5 billion for 2018/19, from a surplus of £10.4 billion to a deficit of £21.9 billion for 2019/20, from a surplus of £11 billion to a deficit of £20.7 billion for 2020/21 and a deficit of £17.2 billion in 2021/22.

The OBR also pencilled in people to be around 3% poorer compared to its March forecasts.

It said consumers would suffer a blow to their real consumption wage - a measure of wages adjusted for inflation - as weak productivity impacts earnings and the Brexit-hit pound pushes up the cost of living.

Mr Hammond said the prospect of higher borrowing and slower asset sales, coupled with the Bank of England's decision to expand quantitative easing in August, would increase Government debt in the coming years.

The OBR has predicted debt to rise from 84.2% of GDP last year to 87.3% for 2016/17, before peaking at 90.2% in 2017/18 as the Bank's measures reach full effect.

It then predicts debt to fall to 89.7% of national income in 2018/19, to 88% in 2019/20, to 84.8% in 2020/21 and 81.6% in 2021/22.

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