The UK economy will take more than a year to recover its pre-pandemic strength despite Jeremy Hunt’s efforts to boost growth after last year’s mini-budget debacle.
A loosening of the purse strings over the next five years by the chancellor will prevent the economy falling into recession this year, according to the Office for Budget Responsibility, making the downturn “shorter and shallower” than it was predicting in November.
However, it will take until the summer of 2024 before the economy regains the same level of activity seen in 2019.
Despite the slightly brighter outlook for the economy, which was previously expected to slide into recession this year, the OBR warned households are still facing the largest fall in living standards on record over the next two years.
Wage rises are expected to continue to ease, leaving living standards 5.7% lower at the end of the next financial year, the largest two-year fall since records began in 1956-57.
Headline inflation is forecast to fall sharply, from a current rate of 10.1% to 2.9% by the end of the year.
Paul Johnson, the director of the Institute for Fiscal Studies, said the broad economic outlook for the next five years was largely unchanged since the autumn when the fallout from the mini-budget prompted the OBR to forecast a recession in the first half of the year.
“The OBR expects the economy to grow a bit faster in the short term, and a bit slower in the medium term, combining to produce an economy 0.6% larger in real terms in 2027–28 than under the autumn forecast,” he said.
Extra government spending, falling inflation, and lower than previously expected interest rates this year prompted the OBR to predict the UK economy will shrink by 0.2% in 2023, a much smaller contraction than the 1.4% fall in GDP it was predicting in November. Consumer and business spending, business investment and net trade are expected to drag on growth.
Michael Saunders, a former Bank of England rate setter and senior adviser at the consultancy Oxford Economics, said the OBR’s expectation was that the economy’s underlying growth trend in the next five years will remain low.
“Further action will be needed if the UK is to escape the low-growth rut of the last decade,” he said.
The OBR expects UK house prices to fall by 1.1% this year and by 5.7% in 2024, before rising 1.1% in 2025 and 3.4% in 2026.
Hunt said a three-month extension of the energy price guarantee, capping average annual bills at £2,500 at a cost to the Treasury of £3bn would not only benefit hard-pressed households, it would also help to bring down headline inflation.
After falling to 2.9% by the end of this year, inflation is expected to be about zero in the middle of this decade, before returning to the Bank of England’s 2% target in early 2028.
The OBR economic adviser David Miles said the forecasts for growth were much more optimistic than the Bank of England’s after an assessment found that much lower inflation this year, a dramatic fall in household savings as people spend, and projections of a large increase in immigration increased growth in the short term.
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Government borrowing in 2022-23 is expected to be £152.4bn, or 6.1% of GDP. This is down £25bn from a November forecast, after a £15bn increase in tax receipts and a £10bn fall in the cost of the energy price cap.
Headline public sector net debt is expected to finish the year at 100.6% of GDP, 1.2% of GDP lower than forecast in November.
Richard Hughes, the OBR chair, said the government would meet its fiscal target of bringing debt down as a proportion of GDP – it will fall to 96.9% by the end of the five-year forecast – but with little room to spare.
He warned ministers to consider that the risks to the outlook from global and domestic forces could knock the economy off course, forcing the government to tear up its debt rule.
He said Hunt had spent two-thirds of the extra funds and wriggle room handed to him by an improved economic outlook, leaving him less than £7bn spare in 2028.
“If interest rates were one percentage point higher or lower, borrowing in the final year of the forecast would be around £20bn higher or lower,” he said.
Another risk to the forecasts was the outcome of any strike action that leads to higher public sector pay settlements.
Figures based on current departmental budgets include pay increases of 3-3.5% for public sector workers, despite strikes that could lead to higher awards for nurses, ambulance drivers and teachers.
The forecasts were also made on the assumption that the government would meet pledges to clear the NHS backlog on time, something thinktanks, including the King’s Fund, have previously described as looking “ambitious”.
