Hopes that recent lower-than-expected borrowing would create room for Chancellor Hammond to loosen the fiscal reins in his autumn Budget have been dented by the Office for Budget Responsibility’s latest forecast.
The OBR revised 2017-18 borrowing down by only £4.7 billion versus expectations of up to £10 billion. Moreover, the reduction in current and future years is attributed to a cyclical boost from the economy operating at a higher level relative to potential rather than an improved structural position. The OBR left its forecast for the structural deficit in 2020-21 unchanged at 1.3% of GDP – well within the “fiscal mandate” requirement of below 2.0% but implying no additional headroom relative to the November forecast.
The new economic numbers are similarly conservative: average GDP growth of 1.4% per annum over 2018-22 is marginally lower than in November, while the OBR has dismissed recent better productivity performance as a temporary blip.
The borrowing undershoot in 2017-18 reflects stronger growth of nominal GDP and receipts than the OBR projected. The new forecast shows nominal GDP growth falling from 3.8% in 2017 to 3.1% in 2018. This looks realistic and may even prove over-optimistic: the year-on-year rise in nominal GDP eased to 3.2% in the fourth quarter of 2017 and monetary trends suggest a further slowdown – see chart.