November saw the Chancellor Philip Hammond deliver his first Autumn Statement, which was accompanied by the publication of the Office for Budget Responsibility’s first set of forecasts for the economy and the public finances since the EU referendum.
The Chancellor’s announcements included additional infrastructure investment, a modest change to Universal Credit, an increase in Insurance Premium Tax to raise revenues, and a change to the timing of the Budget (moving it from spring to autumn after 2017). The Library’s briefing paper Autumn Statement 2016: a summary has a list of the key announcements.
The Government also proposed new looser targets for public sector borrowing, debt and the welfare cap (for total spending on certain benefits). The Government’s proposed borrowing target requires structural borrowing – which ignores the ups and downs of the economic cycle – to be below 2% of GDP in 2020/21.
These targets will need to be approved by Parliament in a revised Charter for Budget Responsibility – see the Library briefing The Office for Budget Responsibility and Charter for Budget Responsibility for more on this.
New OBR forecasts
The Office for Budget Responsibility revised up its 2016 economic growth forecast slightly compared with its previous March forecasts but lowered those for 2017 and 2018. The OBR believes that in the next couple of years uncertainty following the EU referendum will lead firms to delay investment and that consumers will be squeezed by the expected rise in inflation resulting from the fall in the pound.
Some of these effects are mitigated by net trade (exports minus imports) providing a larger boost to growth over the next two years because the fall in the pound is expected to: (i) lead to lower growth in imports (as they become more expensive); (ii) support growth in exports (as they become cheaper internationally).
The OBR left its forecasts for 2019 and 2020 GDP growth unchanged.
OBR forecasts for government borrowing have increased. Some of this is a result of policy decisions taken by the Government in the Autumn Statement, but much of the increase comes as a result of the OBR reassessing its forecasts to reflect changes in the economy and public finances.
According to the Institute for Fiscal Studies, the forecasts suggest that real (inflation-adjusted) wages in 2021 will still be below their 2008 level. They said that there had been no period remotely like it in the last 70 years.
What else is happening to the economy?
A summary of key indicators this past month:
- While consumer price inflation is forecast to rise next year, it currently remains low at 0.9% in October (CPI measure), with wages continuing to rise faster than prices.
- The employment rate remains high (74.5% of all people aged 16-64 were in work in July-September) and the unemployment rate remains low (4.8%).
- New estimates of quarterly GDP growth in Q3 2016 were unrevised at 0.5% in Q3 2016, similar to the pre-referendum trend – growth continues to be driven by the services sector and by consumer spending.
- Business investment grew by 0.9% in Q3 2016, although compared with the year before it was down by 1.6%.
- The pound rose by 2.7% in November against a basket of the UK’s main trading partners’ currencies. As of 5 December, the pound was still 10.1% lower since the EU referendum
- Oil prices have risen after OPEC’s 30 November agreement to cut production.
This article was originally published in the December edition of the Library’s Economic Indicators paper. The monthly publication provides a snapshot of key economic data covering: growth, labour market, finance, borrowing, trade, exchange rates, business, retail and housing. Individual pages are updated through the month as new data come out.
Picture Credit: Virgin Voyage | Land Rover Celebrates Production of First New Discovery Sport by Land Rover MENA; Creative Commons Attribution 2.0 Generic (CC by 2.0)