- Public sector net borrowing remains on track to come in well below the OBR’s forecast for 2021-2022. Both revenues and spending are outperforming forecasts due to the economic recovery beating the OBR’s very cautious assumptions.
- The EY ITEM Club expects the OBR to judge that a decent amount of the stronger-than-expected fiscal performance is structural in nature when it presents updated forecasts in October. The OBR’s downbeat view on the extent of long-term economic scarring increasingly looks like an outlier, with the Bank of England taking a much more positive view.
Martin Beck, senior economic advisor to the EY ITEM Club, says:
“Public sector net borrowing (excluding public sector banks) came in at £10.4bn in July, £10.1bn lower than a year earlier. This meant that borrowing over the first four months of fiscal year 2021-2022 totalled £78.0bn, £61.6bn down on a year earlier and well below the £106.8bn forecast by the OBR. Both receipts and spending continue to perform better than the OBR anticipated, largely due to the strength of the recovery through the summer which has comfortably exceeded the OBR’s very cautious near-term forecast.
“The scale of the outperformance should lessen over the latter part of the fiscal year, given the backloaded nature of the OBR’s growth forecast. But the EY ITEM Club still expects borrowing to come in at around £215bn for 2021-2022 as a whole, well below the OBR’s forecast of £233.9bn.
“However, the key question is the degree to which the OBR will deem the stronger-than-expected fiscal performance to be cyclical or structural, when it comes to deliver its updated forecasts on 27 October. The EY ITEM Club thinks it will rule that it’s a mix of the two. The OBR’s current view that there will be economic scarring of 3% of GDP from the pandemic looks pessimistic and is a clear outlier given that the Bank of England recently said that it thinks scarring is likely to be closer to 1% of GDP. Should the OBR agree, its forecast revisions will give the Chancellor more policy flexibility if he presents a Budget in October.”