After the Autumn Statement, Robert Chote gave a statement on the OBR’s view of the economic and fiscal outlook. Here is a summary of the key points.
The OBR expects the UK economy to grow 0.9% this year, and 0.7% next year, with most of next year’s growth occurring in the second half. Their projections suggest a roughly 1-in-3 chance that there UK will see a contraction over at least one quarter.
The productive capacity (and hence potential long-term growth rate) of the UK economy is lower than was previously thought. This means that by 2016 the economy will be about 3.5% smaller than the OBR thought in March.
Debt and the deficit
Weaker growth has implications for the government’s fiscal position. More of the deficit can be seen as structural, not cyclical (meaning there is further to go to reduce the targeted structural deficit).
The date the government will meet the fiscal mandate has been pushed back. There will be more real terms cuts to come beyond this spending review period. These cuts are, as-yet, unquantified, which means there will be more cuts for that the next government must make if the fiscal mandate is to be met.
Firms have less cash available for investment than was previously thought, and tight credit conditions may be constraining the ability of the economy to reallocate resources to more productive areas
The OBR still expects rebalancing to happen: net trade and business investment are expected to be the sources of growth. However, the OBR’s forecasts for both of these have weakened.
The OBR – like the Bank of England – did not quantify the potential risks of any sort of Eurozone “meltdown” though Chote did comment that there were three general ways in which the UK economy could be affected: reduced trade, credit tightening, and some impact (which could be positive or negative) on the government’s borrowing costs.
Public sector job losses are expected to reach 710,000 compared with the 400,000 forecast in March.
Chote said that he thought that the youth jobs scheme would make little difference to overall employment levels, with some older workers being displaced by younger workers.