The Chancellor is set to receive a rare piece of good news on Budget day as the Office for Budget Responsibility’s (OBR) forecast is expected to reveal lower borrowing projections and stronger GDP growth, according to the EY ITEM Club Budget preview.
OBR forecast set to deliver some Budget day fiscal cheer for Chancellor, says EY
- OBR likely to revise down public sector net borrowing forecast for 2016/17 by £3b to £65b
- 2017 GDP growth expected to be revised upwards to around 1.6%
- Although substantial policy announcements are not expected, health and social care funding likely to be high on the Chancellor’s agenda
Stronger than expected tax receipts should push down the OBR’s borrowing forecast for the current fiscal year by £3b to £65b. At the same time, the EY ITEM Club report says that better-than-expected momentum in the UK economy is likely to lead the OBR to revise its GDP forecast for this year upwards from 1.4% to 1.6% or 1.7%.
However, the EY ITEM Club says that the OBR is unlikely to make any substantial changes to its forecast further out, suggesting that any effects of Brexit on GDP growth are likely to develop outside of its 2021 forecast horizon.
Martin Beck, senior economic advisor to the EY ITEM Club, comments: “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’.
“One of the most interesting aspects will be how the OBR deals with the latest Brexit developments. We suspect there will be few changes 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.”
Low key Budget but Chancellor may act on social care and NHS
Despite the new Autumn Budget being the key fiscal event moving forward, the EY ITEM Club says that the Budget on 8 March will not be completely free of policy announcements. The Government will likely make further steps towards achieving the Conservative party’s manifesto commitment to raise the tax-free personal allowance to £12,500 and the threshold for the 40% rate of income tax to £50,000 by the end of the current Parliament. A personal allowance increase to £11,800 and a rise to £46,500 for the 40% threshold to kick in would keep this commitment on track, the report says.
With the Government likely to want to head off concerns around a ‘cost of living crisis’, a temporary cut in fuel duty could be a relatively inexpensive yet popular move. The Chancellor may also look to repeat the decision made in 2011 to defer the standard inflation driven increase in Air Passenger Duty (APD) for one year. The EY ITEM Club Budget preview says both measures would offer some support to consumers against higher inflation stemming from the pound’s weakness.
The reported pressures on the NHS budget and local authority social care shortfalls may prompt the Chancellor to relax the spending constraints set in the November 2015 Spending Review, according to the report. While the scale of spending in these areas means that a significant amount of money would be needed to make a difference, the Chancellor could tolerate some rise in borrowing to boost funding.
Stuart Wilkinson, tax partner at EY in Cambridge comments: “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, although we may need to wait until the autumn for these policy changes.”
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About EY ITEM Club:
The ITEM Club is the only non-governmental economic forecasting group to use the HM Treasury’s model of the UK economy. Its forecasts are independent of any political, economic or business bias and this independence is underpinned by the untied sponsorship of Ernst & Young LLP.
ITEM stands for Independent Treasury Economic Model. HM Treasury uses the UK Treasury model for its UK policy analysis and Industry Act forecasts for the Budget. ITEM’s use of the model enables it to explore the implications and unpublished assumptions behind Government forecasts and policy measures. Uniquely, ITEM can test whether Government claims are consistent and can assess which forecasts are credible and which are not.
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