- Although September’s data confirmed that borrowing is on track to come in below the OBR’s 2021-2022 forecast, some of the consequences for the public finances data of a stronger-than-expected economy may be deferred until next year.
- The OBR agreed to the Chancellor’s request to close the Budget forecasts earlier than usual, missing key recent developments. In this context, although the OBR may rein back its pessimistic view on the long-term outlook next week, it may not go as far as the latest evidence would support.
Martin Beck, senior economic advisor to the EY ITEM Club, says:
“Public sector net borrowing (excluding public sector banks) was £21.8bn in September, £7bn lower than a year earlier. This meant borrowing over the first half of fiscal year 2021-2022 totalled £108.1bn, £101.2bn down on a year earlier and well below the £151.6bn forecast by the Office for Budget Responsibility (OBR).
“Stronger-than-expected tax receipts continued to account for the bulk of the borrowing undershoot, though spending has also fallen back more quickly than anticipated. In both cases this reflects a much stronger recovery in activity than the OBR’s cautious forecast. These improvements are set to be sustained, and the EY ITEM Club expects full year borrowing to come in at just over £200bn, well below the OBR’s forecast of £234bn.
“The EY ITEM Club expects the OBR to make significant revisions to its forecasts in next week’s forecast update, which will be published alongside the Budget and Spending Review. But the OBR’s near-term forecast for growth is likely to remain too low, given its decision to close the economy forecast on 24 September, before substantial upwards revisions to the GDP data were published by the ONS. Furthermore, given the fiscal forecast was closed on 1 October, it will only partly incorporate the effects on borrowing of the recent increase in government bond yields.
“There is a strong case for the OBR to revisit its pessimistic view of the likely level of scarring from the pandemic. Just how much it moves in that direction will influence the medium-term position of the public finances and extra policy leeway the Chancellor might have over the next few years.”