MNI INTERVIEW: OBR To Cut UK Borrowing, Growth Outlooks

The UK’s Office for Budget Responsibility is likely to lower forecasts for public borrowing by some GBP30 billion for this year and next when the government announces its March 15 Budget, but take a darker view of the medium-term outlook for economic growth, a senior research economist at the Institute for Fiscal Studies told MNI.

The official fiscal forecaster is likely to revise up its estimates of GDP deflator inflation used for fiscal calculations, the IFS’s Isabel Stockton told MNI in an interview. These were strikingly low when it last made calculations in November, below 2% in all the financial years between 2024-25 and 2027-28 and as low as 0.5% in 2025-26. Higher inflation tends to mean a higher tax take.

"We may at the same time expect the OBR to revise the GDP deflator upwards, which in the November forecast is really extremely low … If they revise nominal GDP down by less than real GDP that would help with revenues,” Stockton said.

Another big call for the OBR will be whether it takes the view that the better-than-expected tax revenues post pandemic relative to growth will persist.

"Do they think that was just a one-off or a stronger recovery but that it will peter off once we are back on a longer-term trend or do they think that is a permanent change in the economy becoming more tax rich for a given amount of growth?” Stockton said.

DOWNGRADE TO GROWTH

The OBR is also likely to lower its estimate of potential supply growth, pulling down its medium-term growth estimates, following in the footsteps of the Bank of England, which announced such a move in its February Monetary Policy Report. Stockton noted though that the OBR has tended in the past to be more upbeat than the BOE, which cut its view of potential UK supply growth to around 0.7% a year in 2024/25. In November, the OBR had placed its estimate it at around 1.75% towards the end of its five-year forecast. (See MNI INTERVIEW: UK Productivity Suffering Long-Term Scarring)

"The OBR may not adjust all the way down to the Bank's forecast … In the past, certainly since 2016, the Bank's growth forecasts have often been more pessimistic than the OBR's. It may be that that pattern continues and that the OBR continues to have a slightly higher real growth forecast [but] just looking at real growth I still think it looks more likely that the OBR will revise down rather than up,” Stockton added.

It will be, ultimately, a judgement call for the OBR based on its views on labour force participation, investment and productivity.

“The important thing is what you think is persistent and what you think is transitory,” Stockton said.

FISCAL RULE

Another thing to watch in the budget will be whether the surprisingly large improvement in the tax take since Covid re-opening makes things trickier for the Treasury if Chancellor of the Exchequer Jeremy Hunt sticks to his rule of having debt-to-GDP declining in the final, fifth year of the forecast compared to the fourth.

"Then the problem with this particular fiscal target is if you get more growth in GDP in the short-term and less between years four and five and if you come into year four with a lower debt stock, then that makes that target harder to reach," Stockton said.

One option would be to ditch the fiscal rule, or tweak it. But the UK has a history in recent years of rapid adoption and rejection of self-imposed fiscal rules, which undermines their usefulness.