LONDON – The Office for Budget Responsibility (OBR) said it will have to “significantly” lower its estimates for UK productivity, blowing a large hole in public finances ahead of the UK government’s November budget.
In its Forecast Evaluation Report for October, which you can read here, the OBR admits that it overestimated the productivity of UK workers in its March forecasts.
The revised figures point to the average rate of productivity growth of 0.2% over the past five years as a more accurate guide for 2017 than the previous forecast of 1.6%.
This new analysis means Chancellor Philip Hammond will be forced to produce a November budget based on more pessimistic forecasts of growth.
The OBR’s revised forecast is set to wipe out Hammond’s ability to set aside money to smooth Britain’s exit from the EU. Hammond last year pledged to build up a £27 billion war chest to help boost growth during Brexit. But if growth is slower, there will be less money collected in tax receipts and therefore less to set aside.
The OBR’s revisions will reduce Hammond’s war chest by as much as two-thirds, leaving Hammond with just “single digits of billions” to work with, according to Treasury officials cited in reports last week.
John McDonnell, Labour’s Shadow Chancellor, said: “Today’s report by the OBR is a damning indictment of the last seven years of Tory economic failure. We need no more proof that their austerity approach has failed to boost living standards or improve the long-term potential of the UK economy.”
“On a day when figures on construction published by the ONS show warning signs ahead for our economy, the mounting evidence for a change of direction from the Chancellor couldn’t be clearer,” he said.
Hammond and the rest of Theresa May’s government are under pressure to increase public spending and ease its austerity agenda after the Conservative party’s failure to retain its majority in the June general election.
However, this will prove difficult for the Hammond, with with the economic repercussions of Britain’s decision to depart the EU beginning to take effect on the government’s purse.
Hammond and the Treasury are committed to cutting the deficit to just 2% of GDP by the fiscal year 2020-21. If the Chancellor wishes to stick to his current deficit reduction schedule he will have to slash the amount of money set aside for Brexit in light of the OBR’s revised forecasts.
Until now the OBR has been significantly more optimistic about the prospects for the British economy than the likes of the Bank of England and the OECD. The new forecasts are likely to bring it closer to par with these institutions.