Listen: UK outlook worsens
Britons are about to become poorer, according to the latest forecasts by the UK’s Office for Budget Responsibility. Siona Jenkins asks Chris Giles, FT economics editor, to explain why, and whether the policies announced by Philip Hammond, the chancellor, in his Budget are the right ones.
Presented by Siona Jenkins and Chris Giles; produced by Fiona Symon
From the Financial Times in London, I'm Shelley Jenkins and this is FT News. Britons are about to become poorer according to the UK'S Office for Budget Responsibility in its latest forecast.
If it proves correct, real wages will barely grow over the next five years. The public finances will become even more stretched. And the worst decade for the UK real incomes for more than a century will continue for at least another five years.
Here with me to discuss this gloomy outlook is the FT's economics editor, Chris Giles. Hello, Chris. Is it really that bad? The OBR has been found to be overly pessimistic in its forecasts before, hasn't it?
The OBR has actually, I think, been overly optimistic in the last seven years and that's why we've seen this very big downward revision. What they're really doing is they're saying, OK, the game's up. We've actually been too optimistic about the long term future of the UK economy.
Successively, forecast after forecast after the forecast, we keep saying that productivity is going to bounce back positively, the amount you get out for the amount of labour that goes in. And they keep saying that's going to start growing again.
Because over the 50 or so years after the Second World War, it grew at about 2% a year. Over the last decade, it hasn't grown at all. And so, they kept on saying, oh, it'll go back to the long term growth rate. It didn't go back.
And this time around, they said, OK. The game's up. We're going to have a much more pessimistic productivity forecast. Still not as bad as the past decade, but not going back to historic growth rates.
And what that means for the overall forecast is the productivity is really one of the foundational building blocks because you can't have more prosperity or more growth in an economy, if you're not getting more out every year from the numbers of people who live there working more efficiently.
And so, if you're not getting more efficient, you can't get paid more. Because there's no more money to pay you. And so, living standards are not going to rise.
And that means, tax revenues aren't going to rise faster than hoped, which means you're not going to have lots of money to spend on your vital public services like health and pensions at a time your population is ageing and everything gets harder and harder and harder.
And that's what we got in the budget on Wednesday. We just got a bunch of forecasts that were a lot worse and making the future look pretty grim.
Well, what was the most significant points in the OBR's forecast?
Well, the most significant part was what I said was the productivity forecast. That was the big change. I'll go through some of the other forecasts but that's the big change. That was the really big thing that dominates everything.
Because that ultimately means that if productivity isn't rising fast, that means the overall size of the economy can't be growing fast. It means that if the economy is not growing fast, why would companies want to invest loads?
Because where are they going to get their return from? So when your investment forecast goes down, people don't have very high incomes. So there'll be some income growth, but it will be lower than was hoped. So household spending goes down. And that is the thing that dominates the set of forecasts.
There is some good news in that. So it's not all bad. And the good news is that in the short term, in the public finances, we have been getting slightly better tax revenues than we thought we were going to get and public spending has been a little bit lower for reasons that are likely to continue into the future.
So the public finances at the start of the forecast period are slightly better than we thought. But then, come here two, the productivity thing gets more important. And then by year five, it completely dominates everything.
Because it just means that the growth rate of the economy is likely to be slower, not for certain, but likely. And what we can say I think is now, maybe the forecast of 50/50, maybe the world will be better than the OBR's forecasting.
Whereas before, when they were being more optimistic, you could say, probably it's going to be worse.
How much of this is due to the impact of Brexit?
Very little. This is not a Brexit change in forecasts. The OBR are being very clear. They are saying the reason they made these big downgrades was because they've been getting it wrong in the past so often. 16 times in a row.
So if you do something that's proved to be wrong 16 times in a row, you probably think maybe we need to change our judgments there. And that's what they've done.
Now how does Brexit affect things currently in the British economic official forecast? They're independent of government, but they produce the forecast for government. They essentially assume, very broad brush, nothing particularly goes wrong over Brexit.
Nothing particularly goes right obviously. Not a leave campaign is saying, it's going to be a wonderful world. It's a very neutral Brexit assumption that the world continues pretty much as it was with a little bit less trade in the years after the UK leaves the European Union.
But growth doesn't take a big hit. And the public finances take a bit of a hit. They already factored in last year. So if there is a big negative Brexit shock, this would come on top of these pretty grim forecasts and that would make it even worse.
I'm not saying that will happen. But that's the way to think about it. This is not a prediction that Brexit's going to be bad. This is a prediction of quite a smooth exit of the European Union. If we don't have a smooth exit, these forecasts are almost certainly going to be too optimistic.
So how did Mr. Hammond respond in his statement to these forecasts? And do you think the policies he announced are the right ones to tackle the UK'S economic problems?
The main thing Philip Hammond did was not very much. He certainly didn't say, OK, so public finances in the long term look worse. Therefore, I'm going to have less public spending or higher taxes just to make the public finances look as they were looking beforehand.
In fact, he actually spent some more money. So there's more money going to the NHS and there were some tax cuts for duties of the housing stamp duty. There's a whole bunch of quite small tax cuts. So a whole bunch of little giveaways, which again which exacerbated the public finances.
So about half of the deterioration in the public finances was because of the forecast changing, getting worse, and half was because the Chancellor decided to loosen fiscal policy, a little. Neither weren't big changes.
Was it the right thing he did? I think so in the short term. We are still running fiscal policy or budgetary policy, which means we don't have a huge deficit anymore. So it's OK not to try and reduce it, not to try to eliminate. It but it's a trade off.
It hopefully is OK so long as nothing goes wrong. But it does mean that the public debt of the UK will not be falling very quickly because we're still running a reasonable sized deficit. We won't be growing either. We sort of haven't stabilised, at about 80% to 90% of national income.
Now that is sort of fine if we have a very stable world forever and nothing changes. You can run that forever, that interest payments aren't too high. The problem lies if you have another recession, where tax revenues fall significantly, then that debt level will rises. Always rises in recessions.
And then they get progressively harder and harder to break down and you do start looking more like countries, such as Italy which started off before the crisis at a debt level of just over 100%. So not much higher than the UK is now. And now, Italy's got a lot of problems in trying to get it down. There's much, much higher than that now.
And they have to have run extremely tight fiscal policy basically forever and it's not very pleasant.
Well, coming back to the UK, is there any silver lining?
I think the silver lining is that these forecasts, for once, are just as likely to be too pessimistic as they are too optimistic. So I think we're now, we don't know. Forecast will be wrong. But in recent years, they've been pretty clear that they've been, at least in the long term, too optimistic.
And we knew that the world was likely to be worse than the forecast was suggesting. This time around, these are big changes to the forecasts. I think it's, at the moment, a pretty reasonable central forecast. The world could easily be better than them.
All right. Well, thank you, Chris. And if you'd like to read more on the OBR forecast and the altered statement, go FT.com.