Economic and fiscal outlook 5 December 2013 Robert Chote Chairman
Coverage and process • Five year forecasts, plus assessment of targets • Independent BRC responsible for conclusions • Helped by OBR staff and other officials • Met with the Chancellor on 14 November • Final post-measures forecast on 29 November • No pressure to change any conclusions
Overview • The economy – Growth higher than expected through 2013 – But recent rapid pace unlikely to be sustained – Growth surprise assumed cyclical rather than structural • The public finances – Deficits revised down by £73 billion from 13-14 to 17-18 – Higher receipts plus (this year) more underspending – Fiscal mandate still met; debt-to-GDP target still missed • The fiscal consolidation – Government extends spending squeeze to 2018-19 – Brings budget back to balance ex APF transfers – And cuts government consumption to post-war low
Recent economic data • Real GDP has grown by 1.8% in first 3 quarters of 2013, compared to March forecast of 0.5% • Private consumption and housing investment stronger than expected, but business investment and net trade continue to disappoint • Hours worked even stronger than GDP, relative to forecast. So productivity disappoints again • Inflation lower than expected
The short-term growth outlook • Real GDP momentum continues into Q4 • But pace of recovery slows in 2014 – Consumer confidence, credit conditions and housing market more conducive to growth. – But productivity, real incomes and export growth remain weak. Euro area still a concern
Real GDP revised higher % growth March December Change p.a. EFO EFO 2013 0.6 1.4 +0.8 2014 1.8 2.4 +0.6 2015 2.3 2.2 −0.1 −0.1 2016 2.7 2.6 2017 2.8 2.7 −0.1 2018 - 2.7 - By early 2018 real GDP 1.4% higher and nominal GDP 1% higher than in March EFO (2.7% including data revisions)
Level of GDP since the trough 116 OBR March 112 2010 = 100 108 104 100 2010 2011 2012 2013 2014 2015 2016 2017
Level of GDP since the trough 116 OBR December 112 OBR March 2010 = 100 108 104 100 2010 2011 2012 2013 2014 2015 2016 2017
Level of GDP since the trough 116 OBR December 112 Outside average 2010 = 100 108 Bank of England 104 100 2010 2011 2012 2013 2014 2015 2016 2017
Higher GDP cyclical not structural 120 Actual output in 2012Q4 = 100 Potential output March 2013 115 Actual output March 2013 110 105 100 95 2012 2013 2014 2015 2016 2017 2018 2019
Higher GDP cyclical not structural 120 Potential output March 2013 Actual output in 2012Q4 = 100 Actual output March 2013 115 Potential output December 2013 Actual output December 2013 110 105 100 95 2012 2013 2014 2015 2016 2017 2018 2019
CPI inflation 5 Percentage change on a year earlier 4 3 2 1 0 1997 2000 2003 2006 2009 2012 2015 2018 March forecast December forecast
The household sector • Pick up in consumer spending this year reflects lower saving not higher real incomes • So we expect consumer spending growth to slow until productivity boosts earnings • Consumption wage weak, but product wage may still be high relative to productivity • Productivity growth only way to deliver rising living standards in the long term
The housing market • House price inflation forecast revised up, reflecting recent data and mortgage finance • Expect house prices to rise 5% in 2014 and 7% in 2015. Level in 2017-18 up 10% since March • Prices rising as demand increases, while supply inelastic. Fundamentals, not a bubble • ‘Help to buy’ contributing to higher demand, raise prices short term and supply later
Business investment I 100 90 Q1 2008 =100 80 70 60 Q1 Q1 Q1 Q1 Q1 Q1 2008 2009 2010 2011 2012 2013 Latest data Pre-2013 Blue Book data
Business investment II 12 10 Per cent of GDP 8 6 4 2 0 1980 1985 1990 1995 2000 2005 2010 2015
The external sector • Big drop in financial services exports in 2012 revised away • Export growth has been volatile – up 3% in Q2, down 2½% in Q3 • Forecast weaker in medium term than March, on slightly slower export market growth • Little net trade contribution to growth • Current account deficit narrows slightly
Risks and uncertainties • Euro area economies and banking systems have yet to fully adjust • Expectation of end to loose global monetary conditions could be disruptive • Productivity growth could disappoint again, delaying a return to real income growth • Household finances in deficit and gross debt rising. Consistent with policy, but potential risks
The public finances • Once again comparisons complicated by: – Government’s decision to transfer Royal Mail pension fund assets to public sector in 2012-13 – Government’s decision to transfer money from Asset Purchase Facility (APF) to the Treasury now and back again when QE reverses • Focus here on Public Sector Net Borrowing excluding Royal Mail and APF transfers • Methodological revisions to come
Net borrowing down in 2013-14 PSNB ex Royal Mail and APF March forecast £119.8bn Underlying increase in receipts forecast –£5.7bn (mainly VAT, onshore CT and stamp duty) UK-Swiss tax agreement receipts shortfall +£2.3bn Larger-than-expected underspending by –£3.5bn central government departments (of which –£2bn policy) Underlying decrease in other spending –£1.7bn (including local authority underspending) December forecast £111.2bn
Public sector net borrowing £bn, excluding 2013- 2014- 2015- 2016- 2017- 2018- RM and APF 14 15 16 17 18 19 March 120 108 96 67 43 - Receipts forecast -3 -10 -13 -15 -15 - Depts’ spending -2 0 -1 0 -4 - Other spending -1 -3 -2 -2 -1 - AS measures -2.0 0.1 0.1 0.4 0.6 0.9 111 96 79 51 23 -2 December Memo: change -9 -12 -17 -16 -19 - Cumulative downward revision of £73bn from 13-14 to 17-18
Autumn Statement decisions • Treasury table shows neutral effect over forecast • £2bn off departmental spending this year, offset by £1.4bn cumulative tax cut to 18-19 and £0.6bn spending increase in 14-15 and 15-16 • This spending increase comprises £5.5bn of specific increases in departmental spending, mostly offset by £2.2bn of unidentified cuts in other departmental spending and £2.7bn cut in welfare and other AME • But package creates spending pressures beyond 15-16 and tax cuts will accumulate beyond 18-19
Total and structural PSNB 12 12 Struct ctural al Mar March ch 10 10 PSNB PSN B March 8 Per cent of GDP 6 4 2 0 -2 -2 20 2007- 07-08 20 2009- 09-10 20 2011- 11-12 2013- 20 13-14 20 2015- 15-16 2017- 20 17-18
Total and structural PSNB 12 12 Struct ctural al Mar March ch PSN PSNB B March 10 10 Struct ctural al Dece cember PSN PSNB B Decem ember er 8 Per cent of GDP 6 4 2 0 -2 -2 2007- 20 07-08 20 2009- 09-10 20 2011- 11-12 20 2013- 13-14 2015- 20 15-16 2017- 20 17-18
The fiscal mandate CACB as % of GDP 2017-18 2018-19 March +0.8 +0.8 Autumn Statement measures - - Implied cut in departmental spending - +1.0 Other forecasting changes (e.g. debt - -0.2 interest) December +0.7 +1.6
Uncertainty and the mandate 4 2 Per cent of GDP 0 -2 -4 -6 2007-08 2009-10 2011-12 2013-14 2015-16 2017-18 Implies 80% chance of success
Public sector net debt 90 80 Per cent of GDP 70 December net debt forecast March net debt forecast 60 50 2009-10 2011-12 2013-14 2015-16 2017-18
Change in net debt on previous year % of GDP 2015-16 2016-17 March +2.4 +0.5 Nominal GDP revisions +0.1 - Lower net borrowing -0.8 -0.6 Other -0.1 -0.1 December +1.7 -0.1
Receipts and spending 50 47 Per cent of GDP 44 41 38 35 32
How PSNB returns to balance 2 t of GDP 0 cent o -2 -2 per c -4 -4 ge, p PSCE i E in R RDEL EL -6 -6 change PSGI in in CDEL VAT AT -8 -8 tive c Cap apital t tax axes -1 -10 Deb ebt i interes erest ulati So Social s sec ecuri rity umul Cum -1 -12 Other s her spend ending ng a and rec recei eipts Cha hange i in P PSNB -14 -1
Squeeze on current spending Government consumption of goods and services as % of GDP 26 26 Forecast 24 24 22 22 20 20 18 18 16 16 14 14 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018
Changing shape of the state Per cent of GDP 2018-19 vs 2007-08 Change in PSNB -2.7 Change in receipts +0.4 Change in net social benefits +1.7 Change in debt interest +1.7 Change in other spending -5.7 (mostly public services /investment)
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