The OBR’s gloomy economic forecasts show why Britain needed something bolderby George Magnus / November 22, 2017 / Leave a comment
How should we think about Chancellor Phillip Hammond’s Budget? His job is a bit like that of someone who’s doubling up as both the captain and the cabin crew of the economic aeroplane in which we are all flying. He has to fly us safely to our destination, but also to attend to all our divergent—and often incompatible—needs and interests. If he gets the balance wrong we will either be angry, or possibly not arrive safely at all. To complicate matters, he also knows there’s a huge storm ahead called Brexit, and he has a particularly unruly group of colleagues who think the storm is a figment of his glum imagination.
In the event, Hammond was more cheerful than he might have been, and looks to have avoided the banana skins that tripped him up earlier this year, also known as tax reforms. (Purely economically speaking, these are badly needed, but can be near-impossible to pull off politically). His speech included an introduction and conclusion that were long on hyperbole, and the middle sections didn’t really add up. But let’s look at the big picture: the safety of the flight, the storm ahead—and then what Hammond did for individual groups and constituencies.
The macro picture is pretty simple. It’s a lot worse than the Chancellor or the rest of us thought. This wasn’t a total surprise because the Office for Budget Responsibility (OBR) had already warned that it would make a major change to forecasts for productivity growth, which it no longer thinks will revert to the pre-financial crisis trend. The UK’s trend growth rate is now thought to be around 1.6 per cent per annum, compared with a previous estimate of 2.5 per cent. Take off population growth of about 0.7 per cent a year, and you can see that in income per head terms, living standards measured this way are pretty stagnant. The OBR expects growth to fail to even get to 1.6 per cent until 2022.
This rather sombre growth outlook leaves us with less leeway to absorb shocks, domestic or external. And it means that the Bank of England is going to have to be especially careful in determining the path of interest rates. Weaker trend growth in the economy might mean…