MNI INTERVIEW: UK's OBR To Cut Spending Outlook On Savings

The UK’s official fiscal forecaster is likely to revise previous expectations for households to sharply run down pandemic savings in projections accompanying the government’s budget on Wednesday, bringing its views on spending closer to the more pessimistic outlook of the Bank of England, Resolution Foundation Research Director James Smith told MNI.

In its November forecast the Office For Budget Responsibility assumed that the saving ratio, excluding imputed pension contributions, would plunge from its Covid lockdown peak of 24% in mid-2020 to zero this year as households responded to soaring living costs, but this has not been supported by recent data, said Smith. A revision would narrow the gap between its forecasts and those of the BOE, which sees household spending at levels GBP40 billion lower than the OBR does in 2023, according to Resolution Foundation estimates.

"All the survey data that we have from our own survey at the Resolution Foundation and from other sources like retail sales suggest that real consumption is falling and nominal consumption is a little higher. It looks like there is this saving going on. The question is really about the extent of that. That is the air gap between the Bank and the OBR," Smith, formerly a senior BOE economist, said in an interview.

A higher savings rate, together with questions over UK labour force participation and the sustainability of what have proved to be much-strong-than-expected tax receipts could temper the OBR’s readout of the country’s fiscal position and of how much room the Treasury has against its self-imposed goal of having debt-to-GDP declining five years down the line. Borrowing seems set to come in at about GBP30 billion below the OBR’s forecasts for the 2022-23 fiscal year, according to Resolution Foundation calculations. (See MNI INTERVIEW: OBR To Cut UK Borrowing, Growth Outlooks)

DATA SHOWS SAVING

Official third quarter savings ratio data showed strong saving, rather than dissaving, although Smith acknowledged that the series is a lagging indicator and prone to heavy revisions.

"If you look at the Bank of England's money data what you have seen is the build-up in deposits continuing at historical average rates, so it doesn't look like people are massively drawing down (their savings)," he said.

The OBR has been towards the top of Treasury-compiled tables for independent growth forecasts for the next couple of years, with the BOE at the bottom. The BOE is likely to raise its projections in May while the OBR, despite factoring in higher near-term nominal growth, could edge its expectations lower. MNI POLICY: BOE Eyes UK Trend Growth As Labour Force Tightens

We saw "the Bank get a little bit more optimistic in its most recent forecast and I think we will see the OBR get a little bit more pessimistic further out in its forecast. But at the moment we have a situation where the Bank of England and OBR practically bookend the optimism and pessimism range of forecasts related to the UK economy ... I think we will see some convergence of those two," Smith said.