- The OBR has lowered its growth forecast for 2021 to 4.0% from 5.5% but compensated by lifting the 2022 projection to 7.3% from 6.6%.
- With the economy contracting less in 2020 than the OBR had expected, the economy is now seen returning to its Q4 2019 level by mid-2022 rather than the end of 2022. This is similar to the EY ITEM Club expectation. The EY ITEM Club believes the OBR is being pessimistic over UK growth in 2021 but suspects this is offset by an optimistic view for 2022.
- The OBR forecasts public borrowing to be significantly less than previously expected at £355bn (17.0% of GDP) in 2020/21. The expected 2021/22 shortfall has been lifted to £234bn (10.3% of GDP) as more supportive measures for the economy have been announced.
- However, with the Chancellor announcing initial moves to rein in public borrowing and the better-than-expected 2020/21 outturn, the OBR now sees total public borrowing £35.3bn lower over 2020/21 to 2025/26 than it had in November 2020.
Commenting on the Office for Budget Responsibility’s growth forecasts, announced as part of today’s Budget, Howard Archer, the chief economic advisor to the EY ITEM Club, says:
“The economy contracted 9.9% in 2020, significantly less than the 11.3% pencilled in by the Office for Budget Responsibility in its November forecast. This was because activity held up better than expected in the fourth quarter amid the November lockdown and other restrictions.
“However, the economy is headed for a weaker first quarter of 2021 than the OBR had anticipated in November and this is a major factor in the OBR cutting its GDP growth forecast for 2021 to 4.0% from the 5.5% previously anticipated. Conversely, the OBR has lifted its expectation for growth in 2022 to 7.3% from 6.6%.
“Further out, the OBR has trimmed its GDP growth forecast for 2023 to 1.7% from 2.3% and made little changes to the 2024 (1.6%) and 2025 (1.7%) growth expectations.
“The overall impact of the better-than-anticipated performance in 2020 and revised GDP growth forecasts is that the economy is now seen regaining its Q4 2019 level by mid-2022 rather than the end of 2022. However, the OBR still sees the economy 3% smaller in five years’ time than it would have been without the COVID pandemic.
“The EY ITEM Club believes that the OBR’s growth forecast for 2021 is on the cautious side and that growth could reach 5.0% as the fast roll-out of COVID-19 vaccines facilitates the easing of restrictions and boosts consumer and business confidence. However, the EY ITEM Club suspects that the flip side will be lower – but still rapid – growth than the OBR expects in 2022, at 6.5%. This means that, similar to the OBR, the EY ITEM Club sees the economy regaining its Q4 2019 size around mid-2022 but we expect more progress to be made in 2021.
“Post-2022, the EY ITEM Club’s growth forecasts are broadly similar to the OBR’s at 2.0% in 2023, 1.8% in 2024 and 1.7% in 2025.
“The Chancellor has been helped by the deficit in the public finances coming in below expectations over the first ten months of fiscal year 2020/21. The budget deficit (Public Sector Net Borrowing excluding banks – PSNBex) amounted to £270.6bn over the first 10 months of fiscal year 2020/21, up from £48.6 bn in April 2019 – January 2020. If the trend of the first 10 months of this fiscal year continued, PSNBex would come in around £318bn.
“However, it looks likely to come in higher than this with a series of other supportive fiscal measures announced. Additionally, the likely contraction in the first quarter of 2021 will affect receipts, while there are also likely to be upward revisions to earlier data – particularly when the ONS incorporates estimates of the likely level of write-offs from the various government-backed loan schemes.
“Nevertheless, earlier forecasts that PSNBex could come in near £450bn in 2020/21 are now outdated. Indeed, the OBR feels that its November estimate of a PSNBex of £393.5bn (19.0% of GDP) is now too high.
“The OBR has cut its estimate of public sector net borrowing in 2020/21 to £354.6 bn, or 16.9% of GDP. However, this is countered by the fact that public borrowing in 2021/22 is now expected to be higher, at £233.9 bn or 10.3% of GDP, due to the additional supportive measures for the economy and jobs.
“Borrowing is then seen falling to £106.9 bn, or 4.5% of GDP, in 2022/23. This is little changed from the November expectation of £104.6 bn (4.4% of GDP). Thereafter, reflecting the measures announced by the Chancellor, public borrowing is seen falling more than previously expected to £85.3 bn (3.5% of GDP) in 2023/24, £74.4bn (2.9% of GDP) in 2024/25 and £73.7 bn (2.8% of GDP) in 2025/26. In November, PSNBex had been seen stabilising around £100bn (3.9% of GDP) in 2024/25 and 2025/26.
“This means that overall public borrowing is now seen £35.3 bn lower over 2020/21 to 2025/26 than the OBR anticipated in November: it is now forecast to reach a total of £928.8bn rather than £964.1 bn.
“A particularly notable feature of the OBR's new forecast is that the peak in the unemployment rate is seen lower than had been expected last November. This largely reflects the extension of the furlough scheme, as well as the recent resilience of the labour market.
“The unemployment rate is now seen reaching a peak of 6.5% in 2021 rather than rising as high as 7.5%. Overall, the expected average unemployment rate has been lowered to 5.6% in 2021 (from 6.8%), 5.9% in 2022 (from 6.5%) and 5.1% in 2023 (from 5.4%). The 2024 and 2025 unemployment rate forecasts are unchanged at 4.5% and 4.4% respectively. These forecasts look broadly defensible overall.”
Budget’s near-term focus is on supporting the economy and jobs
Howard Archer adds: “The near-term parts of the Budget are tilted towards supporting the economy and jobs as lockdown is in place. While hopes are high that the progressive rolling out of the COVID-19 vaccines will facilitate the easing of restrictions, this is not guaranteed.
“The Chancellor says that the Budget provides an additional £65bn of support for the economy over 2021 and 2022, bringing the total to £407bn. Of particular note is the extension of the furlough scheme from the end of April to the end of September. There is also a fourth self-employment support grant made available.
“Other measures include the extension of the VAT cut for the hospitality and leisure sector from the end-March to the end-September; the extension of the increased Stamp Duty threshold from end-March to end-September and a mortgage guarantee scheme for buyers with low deposits. The business rates freeze is extended until June and then rates will be cut by two-thirds for the rest of the year. The £20 week increase in Universal credit is extended for 6 months.
“However, supporting the economy and jobs now is not the sole focus. The Chancellor repeatedly expressed a desire to restore the public finances to a sustainable state over the longer term and he has taken initial steps in this Budget to do that.
“The major move by the Chancellor aimed at improving the public finances over the medium term is raising the corporation tax rate from 19% to 25% in 2023. Another notable move is the freezing of income tax thresholds until 2026.
“The OBR considers that the tax rises announced in this Budget increase the tax burden from 34.0% to 35.0% of GDP in 2025-26.
“To meet his objective of building the UK economy, the Chancellor has announced measures including the establishment of an infrastructure bank and the establishment of eight new freeports.”