Drop in UK growth forecast limits chancellor’s budget wriggle room

<span>Photograph: PjrStudio/Alamy</span>
Photograph: PjrStudio/Alamy

The government’s economic forecaster has cut its prediction for UK growth this year, limiting the Treasury’s spending firepower in the forthcoming budget, according to a report.

In a move that will set the baseline for Treasury’s calculations before the budget in March, the Office for Budget Responsibility (OBR) is understood to have provided a preliminary outlook that shows a weaker rebound this year from a period of high inflation and falling living standards.

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According to a report in the Times, the OBR has told the chancellor he will have £9bn less income after a fall in tax receipts compared with a forecast made in November.

OBR staff provide Jeremy Hunt with two independent assessments of the economy each year and how this will affect the government’s finances based on the Treasury’s spending plans. In a longstanding arrangement, the OBR gives an initial view to Treasury officials for them to begin the process of drafting budget proposals.

In November, the OBR forecast that while the economy would shrink by 1.4% this year it would pick up next year, with GDP averaging about 2.6% over the rest of the forecast period. However, the OBR intends to reduce its forecasts by between 0.2% and 0.5% due to weakness in the economy and labour shortages, the report said.

“There seems to be a view out there that Hunt suddenly has all this money to play with for tax cuts,” one government figure told the Times. “But that is not the view internally. The OBR figures suggest that the prospects for medium-term economic growth will actually be worse than they were in November.”

Inflation is expected to fall during the summer, taking the pressure off the Bank of England to continue raising the cost of borrowing.

There have been increasing signs of economic optimism globally, with the head of the International Monetary Fund telling the World Economic Forum in Davos last week that the global economic outlook is “less bad” than feared.

Rishi Sunak has pledged to halve inflation by the end of the year from its current level above 10%.

The OBR is expected to say that labour shortages will continue to pressure wages, creating what it calls “second-round effects” that will keep inflation higher for longer than it previously estimated.

If inflation falls only modestly, BoE officials could keep borrowing costs elevated for a sustained period.

Hunt is already facing a severe spending squeeze after the government pledged to subsidise the energy costs of all households, rather than put in place a more sophisticated scheme that limited the benefit to low- and middle-income earners.

Official figures showed on Tuesday that the cost of the subsidy, higher borrowing costs and extra health spending pushed government borrowing to a record levelin December.

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Public sector borrowing hit £27.4bn, the highest for December since equivalent records began, according to the Office for National Statistics. Government borrowing is £9.8bn higher than OBR projections at the time of the autumn statement.

The OBR said: “A first round of the economic forecast that provides the basis for our forecast for the public finances has been sent to the Treasury.

“We won’t publish, or comment on any of the numbers in the preparation stages of the forecast as it is not a complete view – the final forecast will be published alongside the budget on 15 March.”

A Treasury spokesperson said the OBR forecast would be discussed only after it was published with the budget in March. They said: “We are focused on halving inflation this year, reducing debt and growing the economy – which will create better-paid jobs and opportunity for everyone.”