- Modest upgrade to near-term GDP growth forecasts and slight reduction in annual projections for government borrowing.
- Bullish projections for rebound in business investment, but export outlook still subdued.
- Business-friendly measures on energy costs, investment, apprenticeship funding and export finance.
- Still substantial budget deficit and fiscal mandate target of achieving small surplus by end of forecast horizon will continue to constrain UK chancellor's room for policy manoeuvre.
Growth in 2014-15
Nothing too dramatic on the economic forecasting front in today's Budget Statement, coming just three months after the chancellor trumpeted a substantially stronger near-term growth outlook in last December's Autumn Statement. Optimism tinged with caution was the core message in the latest headline projections by the Office for Budget Responsibility (OBR), which nudged higher its forecasts for real GDP growth in both 2014 and 2015, but tempered the mood by projecting a slightly weaker level of output from 2016 compared with three months ago.
Reflecting both the robust growth momentum in the economy at present and the impact of recent upward revisions by the ONS to 2013 GDP, the OBR raised its forecast for real GDP growth in 2014 from 2.4% to 2.7%, bringing it broadly into line with consensus (our own expectation is for growth of 2.6% this year). The OBR also edged up its forecast for growth in 2015 from 2.2% to 2.3%.
The OBR is forecasting an aggressive rebound in business investment, with annual growth of 8-9% projected in each of the next five years.
Business investment growth (%)
That is one part of the rebalancing story, but the outlook for exports is far weaker. Indeed, the OBR is projecting no positive contribution to GDP growth over the entire forecast horizon, with a small negative contribution in 2014. On household consumption, the OBR expects quarterly growth rates to ease through the course of this year as spending growth slows to rates more aligned with the rise in household incomes.
The OBR continues to hold a less optimistic view of medium-term growth prospects than a number of other forecasters (not least the Bank of England), reflecting the fiscal watchdog's more cautious estimate of the “output gap” or the level of spare capacity in the economy. This directs the OBR's thinking on how much of the remaining hole in the public finances is permanent (rather than cyclical), how much of it should therefore disappear once the economy is back in good health, and thus the potential growth rate of the UK economy over the medium term.
The OBR believes that the current period of robust activity is primarily cyclical, rather than a lasting shift in the economy's trajectory.
As a result, it revised down rather than up its growth forecasts in later years, by 0.1 percentage points in 2017 (to 2.6%) and by 0.2 percentage points in 2018 (to 2.5%). It stressed that the outlook for productivity growth, which underpins income growth and the sustainability of the recovery, remains the key uncertainty in its forecast.
Reflecting the stronger near-term growth picture, the fiscal outlook has improved slightly since the Autumn Statement, with Public Sector Net Borrowing expected to come in at £95.5bn this financial year (compared with £96bn previously), equivalent to 5.5% of GDP. This would represent a modest decline from £107.8bn in 2013/14 and down from a peak of £157.3bn in 2009/10.
The OBR expects the deficit to continue to fall steadily over the next five years, reaching a small surplus in 2018/19.
However, its estimate of the size of the structural deficit was largely unchanged from three months ago, which implies that there is still a considerable amount of fiscal austerity to come in the form of a public spending squeeze if the government is to meet its fiscal surplus target. Around 60% of the planned expenditure cuts in the coalition's eight-year fiscal consolidation programme are still to be implemented.
On the policy front, yesterday Rachel provided a recap of EEF's key Budget asks in the areas of energy, investment and skills. In particular, we argued strongly for the need to reduce the rising cost of energy faced by many companies, and the chancellor has acted on that.
The freezing of the Carbon Price Floor will translate into greater clarity for manufacturers' energy bills through to 2020 and provide much needed investment certainty. The Renewables Obligation compensation for energy intensive industries will also help to level the playing field these companies need to compete effectively with others around the globe and, keep production here in the UK.
Additional measures to support investment in modern machinery, boost export finance and encourage more companies to take on apprentices sends a clear message to businesses that manufacturing and rebalancing remains a focus in this parliament. Doubling the annual investment allowance will capture more of manufacturers' investment on new equipment and technology, which are key to a shift in our productivity performance. The OBR's estimates that this could pull forward £1bn of investment highlight the significance of the move.