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Slower growth will force UK to borrow more

Tim Wallace
Chancellor Philip Hammond will unveil the budget on Wednesday - Bloomberg

The Government will be forced to borrow more than previously thought ­after economists trimmed back their growth forecasts for next year.

The economy will grow by 1.5pc this year, according to a range of independent estimates compiled by the Treasury, down from earlier estimates of 1.6pc. Next year, growth will slow to 1.4pc, also down from 1.5pc in last month’s forecasts.

It is thought the Chancellor wants to pour more money into areas such as house building, but may have to be  creative in finding ways to boost construction levels given the shortage of Government funds. Poor productivity growth is dragging on overall growth, limiting the ability of Philip Hammond to spend more money in this week’s Budget. 

The growth numbers are much better than those forecast in the aftermath of last year’s Brexit vote, when economists slashed their predictions. But more recent ­upbeat estimates now appear to have been over-optimistic.

At the same time, unemployment is set to keep falling to 4.1pc at the end of this year and stay low at 4.2pc next year, a major improvement on forecasts earlier this year that joblessness would bounce back to more than 5pc.

Unemployment is expected to keep on falling, hitting 4.1pc before the end of the year

While that is good news in itself, it also underlines the UK’s productivity problem – that more people will be in work, but overall growth will still be very limited.  The Office for Budget  Responsibility (OBR), the watchdog that studies the economy and the Government’s tax and spending plans, is expected to chop its forecasts for the years ahead as productivity has struggled to recover since the financial crisis. 

That will make it harder for the  Government to balance the books, as it means weaker economic and pay growth.

“This would mean notable upward revisions to the deficit forecasts further into the future – precisely at the time the Chancellor’s existing fiscal rules need to be met”, said economist George Buckley at Nomura.

“As a result, Mr Hammond would be prudent to squirrel away any savings resulting from the recent better public finance news in anticipation of what is to come.”

Borrowing fell more quickly than ­expected this year with the deficit ­expected to come in at £51.1bn, which is £7.2bn below the amount the OBR predicted in March. But this unexpectedly good progress will not continue next year.

Economists expect the deficit to fall to £42.9bn, which is above the OBR’s prediction of £40.8bn. Moody’s, the credit ratings agency, said the gloomy outlook had weighed on the UK’s rating.

“We expect the ­uncertainty of Brexit negotiations to continue to weigh on UK economic performance,” Moody’s said, noting it downgraded Britain in September ­“reflecting a significantly weakened outlook for its public finances”.