The OBR said the Chancellor has “relaxed his fiscal targets to make space for a modest infrastructure spending giveaway over the next five years” as it presented its November 2016 economic and fiscal outlook.
The OBR expects growth to slowly rebound after the initial slump caused by the government triggering Article 50 to 1.7% in 2018, 2.1% in 2019 and 2020, and then 2% in 2021. However, the weaker growth outlook will cause the Chancellor adopt a looser fiscal mandate than George Osborne and borrow an additional £122bn to manage the dip.
The government will borrow £68.2bn this year; £59bn in 2017; £46.5bn in 2018-19; then £21.9bn; £20.7bn, and then £17.2bn in 2021-22.
The slow economic forecast will prevent the government from delivering a surplus by 2019-2020, with a £21bn deficit still remaining in 2020-21.
Philip Hammond conceded in his first Autumn Statement that the forecast was slower than “we would wish”. But he added that it’s “still equivalent to the IMF’s forecast for Germany, and higher than the forecast for growth in many of our European neighbours, including France and Italy”.
The OBR noted that it does not know enough about the government’s negotiations to determine their chances of achieving them to make a “precise forecast”.
Therefore, the OBR updated its forecast based on the reaction of the financial markets and external studies since the referendum. It believes a likely Brexit outcome will lead to a depreciation of sterling, the fall in the pound, a reduction in export and import growth and lower net migration, and lower investment.
Looking ahead post-Brexit, the OBR said the overall performance of the economy will be affected by the choices the government makes about regulatory policies that are currently controlled by the EU. “These could move in either a growth-enhancing or a growth-impeding direction,” it added.
No referendum counterfactual
While much is still uncertain, the OBR has constructed a “no referendum” counterfactual. This alternative decomposition calculates that the referendum result and exiting the EU will cost an additional £58bn over five years (£3.5bn 2016-17; £9.9bn 2017-18; 15.4bn 2018-19; 14.7 2019-20; and 15.2bn 2020-21).
“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,” it noted.
“Our forecasts are currently somewhat less pessimistic than those in the Bank of England’s November Inflation Report and the Treasury’s published pre-referendum analysis, but in current circumstances the uncertainty around them is even greater than it would be in normal times”
Hammond countered this gloomy outlook. “The OBR acknowledges that there is a higher degree of uncertainty around these forecasts than usual. Despite slower growth, the UK labour market is forecast to remain robust, he said. “We’ve delivered over 2.7 million new jobs since 2010. This forecast shows that number growing in every year – another 500,000 over the OBR forecast – providing security for working people across the length and breadth of Britain.”