It is official – lower economic growth is forecast for the UK following the UK Referendum vote to leave the European Union. The forecasts come from the UK Office for Budget Responsibility (OBR). The OBR is an advisory non-departmental public body established by the UK government in 2010 to provide independent economic forecasts and analyses of the public finances as background to the preparation of the UK budget. The most recent OBR forecasts formed a central part of the Autumn Statement, a budget in all but name. That Statement was delivered to the House of Commons by the UK Chancellor of the Exchequer, Philip Hammond, on Tuesday 23 November 2016.
The Autumn Statement shows that the UK Government is no longer on course to balance the budget during the current Parliament and has formally dropped this ambition in a significant loosening of its fiscal targets. Public sector net borrowing is now expected to fall more slowly than previously forecast, primarily reflecting weak tax receipts and a more subdued outlook for economic growth as the UK negotiates a new relationship with the European Union.
Mr Hammond tried to put a brave face on the economic evidence in his Autumn Statement, by announcing that
“It is a privilege to report today on an economy which the IMF predicts will be the fastest growing major advanced economy in the world this year”.[i]
But then he did have to admit that
“In 2017 the OBR forecasts growth to slow to 1.4%, which they attribute to lower investment and weaker consumer demand, driven, respectively, by greater uncertainty and by higher inflation resulting from sterling depreciation”.
OBR Economic Forecasts
The OBR Economic Forecasts that underpin the Chancellor’s Autumn Statement cannot predict in any precise manner what agreement the UK will strike with the EU on Brexit. However, the OBR’s current view is that the referendum decision means that potential growth over the forecast period is 2.4 percentage points lower than would otherwise have been the case. Specifically, the OBR forecasts assume:
- that the UK leaves the EU in April 2019;
- that the negotiation of new trading arrangements with the EU and others slows the pace of import and export growth for the next 10 years, and
- that the UK adopts a tighter migration regime than that currently in place.
The OBR clearly set out the key judgements it used in preparing its forecasts. These are listed in Table A:
Table A: UK Office for Budget Responsibility: Key Judgements underpinning Forecasts
1. the referendum result and forthcoming post-Article 50 negotiations have generated uncertainty for firms that will lead to some investment being postponed or cancelled;
2. the fall in the pound will squeeze households’ real incomes by pushing up import prices;
3. the depreciation of sterling will boost net trade in the short term;
4. exiting the EU will reduce growth in exports and imports during the transition to a less trade-intensive economy; and
5. exiting the EU will be associated with lower net migration than would otherwise have been the case. The OBR has not modelled the effects of a specific post-exit migration.
Source: UK Office for Budget Responsibility: Economic and fiscal outlook, Presented to UK Parliament by the Economic Secretary to the Treasury, November 2016.
The OBR is required by legislation to produce its forecasts on the basis of current stated Government policy (but not necessarily assuming that specific objectives will be met). The OBR’s November Report runs to over 270 pages and it sets out clearly the wide range of assumptions required to produce its forecasts. They admit that in the current context of looming Brexit negotiations, this was far from straightforward. The report noted that it had been given no information regarding the Government’s goals or expectations for the negotiations that is not already in the public domain.
Having made its assumptions, the OBR forecasts that the UK economy will grow more slowly than expected in March 2016, with Gross Domestic Product growth in 2017 revised down from 2.2% to 1.4% and cumulative growth over the whole forecast revised down by 1.4 percentage points, plus a weaker outlook for investment. Inflation is forecast to peak at 2.6% and unemployment to rise modestly to 5.5% during 2018.
The OBR Forecasts provide very useful evidence of what effect Brexit might have on the UK economy. And the UK Chancellor of the Exchequer does not disagree with those forecasts. Of course, the forecasts are based on stated assumptions; all of which may not turn out to be realised.
One of the problems during the five months since the UK Referendum is the number of exaggerated claims that have been made by both proponents and opponents of Brexit. At least there are now some sober and measured estimates pointing to lower economic growth for the UK following the referendum vote to leave the European Union.
[i] Speech by Phillip Hammond.