OBR: Low productivity clouds economic outlook

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Introducing his Budget speech, Chancellor Philip Hammond hailed “an economy that continues to grow, continues to create more jobs than ever before and continues to confound those who seek to talk it down”.

But with a 2.5% overall downgrade since March in the Office of Budget Responsibility’s five-year growth forecast, Hammond could have said that while the economy is set to grow, it’s going to be slower than we thought.

“We have lowered our real GDP forecast in every year,” the OBR explained in its November report. “We now expect growth to average 1.4% a year over the next five years, slowing a little over the next two (as public spending cuts and Brexit-related uncertainty weigh on the economy) and picking up modestly thereafter as productivity growth quickens.”

The main reason for the declining forecast is “the persistence of weak productivity growth”, the OBR added.

During his speech, the Chancellor noted how government borrowing was going to drop from £39.5bn next year to £25.6bn in 2022-23. With the OBR predicting that borrowing as a percentage of GDP would fall to 1.3% in 2020-21, against a target of 2%, he boasted about the £14.8bn headroom he enjoyed.

The BBC subsequently highlighted the OBR comment that its £13.7bn upward revision of borrowing for 2020-21 “absorbed roughly half the headroom against the ‘fiscal mandate’ shown in our March forecast”.

Expressing his continued commitment to reduce borrowing and shying away from obvious tax increases, Hammond’s had little leeway to spread around public spending largesse.

The money he did have to play with would go towards addressing the country’s ailing productivity and investing in infrastructure, housing and environmental measures such as reduced taxes for electric company cars.

Not as generous as it seems

Most of the moves were incremental increases, or repetitions of promises made in March. Hammond promised to expand his five-year “national productivity investment fund” by a year, and underwrite it with an extra £8bn of funding.

Announcing that he was allocating a further £2.3bn for investment in productivity, he unveiled an increase in the “main R&D tax credit” to 12%. On closer inspection, this related to an increase in the above the line credit claimed by large companies rather than the SME rate, and amounted to a giveaway of £755m over six years to the 4,000 or so companies that took advantage of the scheme.

Like many a Chancellor before him, Hammond deployed some presentational sleight of hand to make a poor economic hand sound a little more exciting on Budget day.

A more straightforward summary of the outlook would be that things aren’t terrible and we are currently doing as well or a little better than we might have expected.

This was essentially the message Bank of England agent Alastair Cunningham shared with accountants from his East Midlands region at an ICAEW conference in Market Harborough on the day before the Budget.

Once the inflationary blip caused by the pound’s post-Brexit slump have worked their way through by Q1 next year, we should be looking ahead to slowing average annual growth of around 1.6% with inflation at around 3%, Cunningham predicted – pretty much in line with the OBR’s forecast for the next couple of years.

“The economy is still doing what we thought it would do,” he said.

Productivity has been been flat since 2008-9 and is evident in the number of companies deferring big decisions in areas such as commercial property or new technology. Companies in the East Midlands are hiring people instead, he explained, so recruitment is getting harder.

Explaining the reasoning behind the recent 0.25% increase in the base lending rate – the first in 10 years – Cunningham said the low growth we have been used to since the financial crisis and recent inflation rate increases mean the UK economy is at risk of overheating at lower growth rates.

“We think of it more as taking our foot off the accelerator rather than slamming on the brakes,” Cunningham said.

About John Stokdyk

John Stokdyk is the global editor of AccountingWEB UK and AccountingWEB.com.

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