Chancellor Philip Hammond’s borrowing bill was slashed in Tuesday's Spring Statement but his fiscal watchdog also revealed its caution over the long-term impact of Brexit.
The Office for Budget Responsibility cut around £4.7 billion from the UK’s overall borrowing bill for the current year, from £49.9 billion to £45.2 billion, while throughout the rest of its five-year forecast borrowing is £20.2 billion lower in total.
Debt and the deficit fall in every year in what Hammond claimed was a “turning point” for the public finances.
On growth, Robert Chote’s watchdog was downbeat about prospects last November, with a 1.5% expansion pencilled in for last year, 1.4% for 2018 and just 1.3% for next year. The OBR today took a slightly brighter view, revising up growth for 2018 to 1.5%, leaving next year unchanged.
Last year’s growth was also revised up to 1.7% in line with the latest Office for National Statistics estimates.
But towards the end of the forecast in 2021 and 2022, the watchdog actually downgraded forecasts, to 1.4% and 1.5%, as the OBR said the improvement to the finances was cyclical rather than a structural improvement.
The borrowing figures also showed a smaller improvement than the forecasts of City economists, predicting around £40 billion in borrowing over the next five years to 2022/23.
The OBR’s forecasts noted: “The economy has slightly more momentum in the near term, thanks to the unexpected strength of the world economy, but there seems little reason to change our view of its medium-term growth potential... as a result, the Government’s headroom against its fiscal targets is virtually unchanged.”
In November the watchdog massively downgraded estimates for the UK’s productivity, which in turn curbs the economy’s ability to grow and generate taxes for public spending. Since last autumn, however, figures have shown the UK enjoying its best six-month spell for productivity since 2005.
Oxford Economics economist Martin Beck said: “The OBR’s pessimism seems deeply ingrained. Although following the ‘bloodbath’ forecasts of last November, presentationally, it would have been difficult to do an abrupt turn.
“The OBR is now below the Bank of England on growth (predicting 1.8% in each year from 2018 to 2020), which doesn’t bode well for coordinating policy.”
Hammond hailed “the first sustained fall in debt for 17 years, a turning point in the nation’s recovery from the financial crisis of a decade ago”. There was, he said “light at the end of the tunnel”.
But economists criticised the halting progress. Aberdeen Standard Investments chief economist Lucy O’Carroll said: “A woeful growth outlook by past standards. Potentially massive dislocation for the economy just around the corner. And all subject to huge, Brexit-related uncertainties.”