UK borrowing and growth better than expected for budget, says report

Britain’s economic growth and borrowing levels will both be better than previously expected when the chancellor gives his budget next month, according to a report.

The economic forecasting group EY Item Club said stronger-than-expected tax receipts meant the Office for Budget Responsibility was likely to cut its borrowing forecast for the current year by £3bn to £65bn on budget day. The fiscal watchdog was also likely to revise its GDP forecast up from 1.4% to 1.6%, or 1.7%, it said.

In November’s autumn statement, the OBR cut its growth forecast for 2017 from 2.2% to 1.4% and revised its 2018 GDP forecasts down from 2.1% to 1.7%. It maintained its outlook of 2.1% growth in 2019 and 2020, before slipping to 2% in 2021. EY said the watchdog was unlikely to make any substantial changes to its longer term forecasts, owing to the uncertainty surrounding Britain’s future status outside the EU.

Martin Beck, senior economic advisor to the EY Item Club, said: “The OBR will paint a marginally better picture of the UK economy and public finances in the short term, but fiscal policy faces major challenges on both the revenue and spending sides in the longer term. However, the continued robustness of the economy and lower-than-expected public sector borrowing mean that there is little pressure on the chancellor to use fiscal levers to support activity or fill any fiscal ‘black hole’.”

On Brexit, Beck said: “We suspect there will be few changes [to the OBR’s future forecasts] given that lingering questions around the UK’s post-Brexit trade relations with the EU and migration policy are likely to go unanswered for some time yet. And while the OBR will probably assume the government is successful in negotiating transitional arrangements, it is not yet clear how long these would last. Likewise, there is still no indication of the size of the UK’s Brexit ‘divorce bill’ although with payments likely to be spread over a long period it should have minimal impact on the OBR’s forecast horizon.”

EY said it expected a low-key budget next month, although there could be announcements on further steps to raise the tax-free personal allowance to £12,500, a temporary cut in fuel duty, and action on social care and the NHS.

Jason Lester, EY’s managing partner for tax, said: “Despite the chancellor’s assertion that ‘budgets should be boring’, it’s hard to believe that this will be an event completely devoid of policy measures. The government will be acutely aware of the need to offset the squeeze on household incomes caused by higher inflation and although we may not get fireworks until the autumn, we should at least be warmed up by a few sparklers.”