UK Budget: key takeaways on the economy from the OBR

The UK’s fiscal watchdog has released its outlook on the state of the UK economy after the latest annual Budget.

Here are the best takeaways on the state of the UK economy over the next four years as Britain navigates its way out of the EU.

Growth hike in 2017 but trouble ahead

The OBR is more optimistic about growth this year, hiking its forecast from a 1.4 per cent to a 2 per cent annual pace of expansion (see chart above).

But in the period to 2021 as a whole, the pace of growth is actually expected to be slightly lower than predicted in November. Accounting for the shift, the watchdog said “we now believe that the economy was running slightly above potential at the end of last year, rather than slightly below it”.

Borrowing bill gets a boost this year

A faster than expected pace of growth will give a boost to the UK’s borrowing bill this year but the overall trajectory of a steadily falling borrowing bill will be broadly unchanged up until 2021-22.

That will help the Chancellor meet the EU’s target to have a deficit of below 3 per cent of GDP this year, but still fall short of his overall goal of balancing the public finances “at the earliest possible date in the next Parliament”, said the OBR.

Still, the chancellor announced nothing that will eat into the £26bn fiscal headroom he has to meet his fiscal targets in a broadly neutral budget.

The deficit will rise, not fall, next year

The UK’s deficit, the difference between tax income and spending, will come in lower than forecast for 2017 as a whole (£51.7bn from £68.2bn) but will swell again next year by £6.5bn, estimates the OBR.

Before today, the deficit was expected to shrink by £7.2bn but the OBR said developments such as the “changes in the timing of contribution requests from the EU, evidence of greater income shifting to beat the April 2016 rise in dividend taxation, and changes in the timing of corporation tax payments” would push up the deficit.

That EU exit bill

The OBR’s forecasts are low on Brexit details but do make two big assumptions: that Britain will be out by April 2019 and any savings made from leaving the bloc will be spent by the government, making it a “fiscally neutral” Brexit on the whole.

The watchdog adds that its borrowing and deficit forecasts do not take account for “any one-off or ongoing EU exit-related payments” including a divorce payments. Some estimates have put the cost of parting at €60bn.

Inflation will be contained by 2019

The fall in sterling will push up inflation above the Bank of England’s 2 per cent target this year, with inflation averaging and peaking at 2.4 per cent this year. It will fall slightly to an average of 2.3 per cent in 2018 before hitting 2 per cent from 2019 onwards.

Moderating price rises should ease pressure on spenders, added the OBR:

From mid-2018, the inflation-related squeeze on consumer spending growth abates.