The latest forecast from the Office for Budget Responsibility produces little overall change to the big picture for Britain’s fiscal position or its economic outlook. Within the categories of spending, taxation and demand in the wider economy, there are some relatively significant changes to the outlook, particularly in forecasts of revenue receipts.
The OBR has significantly downgraded its forecast of how much stamp duty will be collected from housing transactions, with the total about £2bn ($3bn) lower by 2015-16 than in its June forecast. Britain’s housing market has softened considerably since June, and the average of most market forecasters envisages a modest decline in average prices between now and the end of next year. Beyond that, the OBR has assumed house prices will rise in line with average earnings.
However, it expects turnover in housing also to be slower than forecast in June, providing another facet of the lower revenue.
Income tax and National Insurance
Although these are forecast to be somewhat stronger than in June for the current year and 2011-12 – thanks in part to strong bonus growth in the financial services sector – the OBR expects them to be lower in subsequent years.
In particular, the forecast of receipts has been adjusted to take account of moderation in financial sector profitability by 2012-13, as well as growth in wages that is below that of gross domestic product. The forecast also reflects the effects of the rise in part-time employment, which generates less taxable income.
Social security expenditure
Social security accounts for the biggest single change in expenditure by 2015-16. Overall, it is expected to fall faster in the years 2012-13 to 2015-16 than had been expected in June, with the final year some £3bn-£6bn less. Among factors explaining the reduction, many more of those eligible for disability allowance are expected to be designated fit for work.
But some of the reductions in spending are offset by higher forecasts for inflation, and by government plans to reduce capital investment by less than it originally planned.
The average university tuition fee will rise from £3,290 to £7,500, the OBR expects, once the government has made its reforms to higher education finance. The reforms, which include a rise in the maximum annual fee to £9,000, are also expected not to cause a fall in student numbers. The higher education reforms will therefore increase the flow of student loans required to pay their fees.
In 2015-16, the OBR expects the government to borrow £10.7bn to pay out student loans, compared with £4.1bn at the moment. Of that £6.6bn increase, it estimates £5.6bn is the consequence of the government’s higher education reform proposals.
Overall, the OBR expects the deficit on the current budget, as a percentage of GDP, to be somewhat smaller in the years 2010-11 through 2014-15 than it originally forecast, with public sector net debt also lower.
This has already turned out to be stronger in 2010 than had been forecast initially, and the OBR has upgraded its 2011 forecast by 0.1 percentage points. Consumption is likely to fall in each of the next three years, growing more slowly than the rate at which GDP expands.
The big change that the OBR is forecasting for households comes in the savings rate – it had forecast this to be at or above 6 per cent for much of the period as households repair their finances and pay down debt.
The forecast savings rate has now been almost halved as households find they must spend a higher proportion of their slow-growing income to meet basic necessities.
With households and government retrenching to repair overstretched balance sheets, business investment could be a driver of growth.
The OBR now feels that this will pick up even faster in 2011 than it believed in June, partly due to the need to restart asset replacement programmes that had been put on hold.
But it has downgraded its forecast for 2012 and 2013, in part because of the difficulty for smaller companies in accessing external finance. In later years, however, it now expects even stronger growth in business investment.
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