The Office for Budget Responsibility (OBR) has forecast growth to slow and inflation to rise in the UK over the next two years.
The growth forecast for this year has been upgraded slightly to 2.1%, from 2% predicted in March. The OBR however downgraded the expected economy growth from 2.2% to 1.4%, partly due to higher inflation on the back of the sterling’s plunge.
The OBR expects growth to be 2.4% slower in the next five years as a result of the Brexit vote.
“The major surprise is the relatively small downgrades to the UK’s economic outlook over the next five years. We need to see the rationale for why the Office for Budget Responsibility has taken this view, but they have certainly made the Chancellor’s job easier today by doing so,” said Aberdeen Asset Management chief economist Lucy O’Carroll.
In his Autumn Statement, Chancellor Philip Hammond confirmed the government is no longer seeking a budget surplus in 2019-20, as it is now committed to returning public finances to balance “as soon as practicable” — which could mean as late as 2025.
Hammond said borrowing would hit £68.2bn this year and £59bn next year compared with the March forecast of £55.5bn and £38.8bn.
Productivity investment fund
Additional borrowing of £23bn over the next five years is to be used to invest in technology, housing, and transport infrastructure through a new National Productivity Investment Fund to raise UK productivity.
“Although a mixture of both novel and preannounced measures, the £23bn initiative’s emphasis on R&D, housing, transport and digital infrastructure signals that the state will be assuming a bigger role in the economic life of the country,” said Jamie Clark, co-manager on the Liontrust Macro Equity Income fund.
“This was underscored in the long-term commitment to increase infrastructure expenditure from 0.8% of GDP in the present fiscal year, to 1-1.2% on an ongoing basis,” Jamie Clark, co-manager on the Liontrust Macro Equity Income fund. Modest in the context of the multi-decade decline in infrastructure expenditure, but an inflection that is party to a more global recourse to fiscal policy,” Clark added.
“[Hammond] has clearly tried to make productivity a focus. He has correctly identified the long-term problems faced by the UK economy, and this Autumn Statement is a move in the right direction. But there isn’t really enough money being spent here to solve these long-term problems – hardly surprising, perhaps, when there is so much uncertainty around Brexit,” O’Carroll said.