Relatively little time has passed since the office of Budget responsibility’s (OBR’s) November forecast and the outlook for the economy and public finances looks broadly the same. The OBR considers the economy has slightly more momentum in the near term, thanks to the unexpected strength of the world economy, but it hasn’t changed its view of the UK’s medium-term growth potential. The budget deficit is likely to come in almost £5 billion lower this year than expected in November.
Growth and employment have performed broadly as expected since November and the OBR has made only small revisions to its economy forecast. The latest data shows real GDP growth slowing from 1.9% in 2016 to 1.7% in 2017 (and to 1.4% in the year to the fourth quarter of 2017). The OBR is forecasting growth of 1.5% in 2018, slowing a little more in 2019, then picking up modestly over the subsequent three years. At 1.4% a year, the average growth rate over the forecast is unchanged from November.
The budget deficit is expected to be £45.2 billion this year, £4.7 billion less than forecast in November 2017. Receipts growth in general has been a little stronger than expected, while self-assessment income tax receipts look likely to fall by £0.2 billion rather than the £3.1 billion originally assumed in November. Borrowing is forecast to continue falling from 2018/19 onwards, with the deficit dropping below 2% of GDP next year and below 1% of GDP in the final year of the forecast. The OBR has said it sees much of the improvement in borrowing since November as cyclical, with its forecast for the structural deficit little changed on average and improved by just £0.3 billion in the Government’s target year of 2020/21.
So, cautious optimism but we aren’t out of that tunnel yet: the Chancellor has said that provided these trends continue to the autumn, he will be able to announce further public spending to alleviate some of the pressure on vital services and the NHS.