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Chancellor to face gloomy fiscal outlook in autumn Budget

The Office for Budget Responsibility plans to cut its productivity growth predictions for the next five years.

Chancellor Philip Hammond is set to be confronted by a gloomy fiscal outlook in Wednesday’s Budget as forecasts are expected to unveil a growth downgrade and higher borrowing.

The Office for Budget Responsibility (OBR) plans to cut its productivity growth predictions for the next five years – a move expected to hit Government tax receipts and drag on UK economic growth.

In October, the watchdog said its productivity downgrade would weaken the outlook for the UK’s public finances, diminishing the £26 billion headroom Mr Hammond had gained ahead of the autumn Budget.

Productivity, which increased by 0.9% between July to September, refers to the amount of work produced either per worker or per hour worked.

Howard Archer, EY ITEM Club’s chief economic adviser, said the productivity cut would be a “major fly in the ointment” for Mr Hammond.

He said: “The OBR has repeatedly assumed in recent years that there will be a marked pick-up in the UK’s productivity performance and this has failed to materialise.

“Consequently, the OBR has now come to the conclusion that some of the temporary factors that it believed were holding back productivity are having a permanent impact.

“It therefore seems probable that the OBR will reduce its GDP (gross domestic product) growth forecasts for the UK and appreciably lift its budget deficit projections.”

In March, the OBR revised up its GDP outlook for this year from 1.4% to 2%, but downgraded next year’s growth from 1.7% to 1.6% and 2019 from 2.1% to 1.7%, before predicting 1.9% growth in 2020 and 2% in 2021.

Alan Clarke, Scotiabank’s head of European fixed income strategy, expects the fiscal referee to revise growth in 2017 down to 1.5%, but hold steady on its predictions for next year.

Growth accelerated to 0.4% in the initial estimate for July to September, picking up from 0.3% during the first and second quarters of this year.

The Office for National Statistics (ONS) will give its second estimate of third-quarter GDP on Thursday and provide the latest figures for UK consumer spending.

The economy is still struggling to bounce back to levels seen in the final quarter of 2016 when GDP rose by 0.6%.

Mr Hammond will also be handed an update on the public finances on Tuesday – the day before the Budget announcement.

The Chancellor has seen the fiscal picture gradually improve in recent months, with borrowing falling to its lowest level for a decade in September at £5.9 billion.

The latest figures from the ONS showed Government borrowing for the current financial year – April to September – had also dropped by £2.5 billion to £32.5 billion, putting Mr Hammond on track to undershoot the OBR’s forecast of £58.3 billion.

John Hawksworth, PwC’s chief economist, is predicting Government borrowing to come in at around £48 million for 2017/18.

However, he said slower productivity growth could cause borrowing to shoot up to £24 billion in 2021/22, compared with OBR forecasts of £17 billion.

He said: “We still think the Chancellor should have some room for manoeuvre in the Budget to boost spending on priority areas like housing and health, and to ease public sector pay constraints selectively, while meeting his medium-term target of a structural budget deficit below 2% of GDP with a reasonable margin.

“But both the OBR and the Bank of England have faced up recently to the reality of sluggish UK productivity growth continuing for some years to come.

“This will also dampen future real wage and tax revenue growth and so make it harder to meet the Chancellor’s longer term objective of balancing the budget by the mid-2020s.”

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