It’s hard to tell which deluge has done more to clog up our email boxes in recent days – the gloomy post-Budget commentary or all those Black Friday spending come-ons: two sides, perhaps, of the same coin. But I can’t be the only one longing for an end to this double-barrelled blitz.
For all the budget measures to help boost investment, productivity and digital skills, the biggest talking-point by far were those gloomy forecasts from the Office for Budget Responsibility. It seems as if the UK overall now more resembles Scotland’s low-growth malaise. GDP is now forecast to be 2.1 per cent lower relative to the OBR’s projections only in March.
And if all this wasn’t bad enough, there was the follow-up OBR prediction that average UK earnings in 2022 could still be less than in 2008. “Pretty grim reading” was the assessment of Paul Johnson, director of the Institute for Fiscal Studies.
I’d only quibble with one word of that summation: “pretty”.
A daunting challenge now faces Scotland’s finance minister Derek Mackay who presents the SNP administration budget next month. Further income tax hikes would widen the gap between Scotland and the rest of the UK and could put Scottish households at a further disadvantage when it comes to discretionary spending.
Philip Hammond raised the threshold at which income earners become liable for the higher 40 per cent rate of income tax to £46,350 in England and Wales while in Scotland it remains at £43,000, the SNP choosing not to apply the previous threshold rise in earlier budgets. First Minister Nicola Sturgeon has now set out a range of proposals which ministers are considering for income tax hikes that could generate between £80 million to£290 million in extra cash for the Scottish Government.
Mr Mackay will also be under pressure to step up skills training support, measures to encourage business R&D spending and to follow the Westminster Budget example to apply the lower Consumer Price Index rate for business rate calculations, rather than the higher Retail Prices Index.
But little of this is likely to affect the overall pessimistic outlook for the economy set out by the OBR. It forecasts growth next year of just 1.4 per cent, falling to 1.3 per cent in each of the following two years, only recovering to 1.6 per cent in 2022 – still well below the long-term growth trajectory of the UK economy of 2.25 per cent.
The gloomy prognostication was further driven home with a forecast that average earnings in 2022 could still be less than in 2008. “We are in danger”, said the IFS’s Paul Johnson, “of losing not just one but getting on for two decades of earnings growth.”
Philip Hammond may have had little alternative but to accept the OBR’s low growth figures. And the poor productivity performance underpinning them cannot be disputed. But how reliable has the OBR’s forecasting record been?
Back in 2012 it predicted economic growth six times stronger between 2010 and 2012 than the actual lout-turn. It admitted it had been caught unawares by the slowdown in the economy over the previous two years, blaming higher than expected inflation and weak exports for getting forecasts wrong.
It predicted back then that Britain’s productivity rate would surge as the world recovered from the financial crisis. But it was wrong and, on the basis of fresh data, now says British workers would struggle to boost their output. Over-compensation for previous errors?
As recently as three years ago it forecast that the UK would be able to run a primary surplus by 2018/19. Its budget assumption was that real economic growth would consistently run at 2.3 per cent to 2.4 per cent above the 2 per cent target of inflation over the next five years – in other words, annual nominal growth of close to 5 per cent by the end of the forecast period. That’s not at all what happened.
Forecasting annual economic performance five years out to the nearest decimal place? Absurd, quite frankly. But to be fair we should note the OBR’s own caveat last week, warning that “huge uncertainty remains around the diagnosis for recent weakness and the prognosis for the future”.
Many suspect the OBR on this occasion has been overly cautious – just as the Treasury itself was notably cautious over the immediate outcome following the Brexit vote. The Bank of England and the International Monetary Fund – hardly tambourine-bashing cheerleaders – are more upbeat about prospects for the British economy next year.
Others suspect the OBR’s downbeat productivity and growth projections fail to capture properly the contribution of Britain’s high-tech and services economy.
Economic forecasts more than a year out are notoriously susceptible to “events”. The best that we can do is take note of current performance and broad-based surveys of business activity and confidence.
Here the UK economy picked up a little speed in the third quarter but it was still far from racing ahead. GDP growth edged up to 0.4 per cent quarter-on-quarter from 0.3 per cent in both the second and first quarters.
Growth in the third quarter benefited from a marked pick-up in consumer spending which may well have been helped by the weak pound. The Office of National Statistics indicated that spending on cars also increased after being held back by tax changes in the second quarter.
Business investment grew but was modest. Net trade was a disappointing drag, but on the output side, growth was lifted by improved industrial production. This outweighed falling construction activity while services expansion matched its second quarter performance.
More recently, a markedly improved November CBI survey lifted retailers’ hopes that squeezed consumers are becoming more prepared to spend as Christmas draws nearer. The main support to consumer spending has come from high and recently rising employment and the EY Item Club’s Howard Archer says the squeeze on consumers should progressively ease in 2018 due to inflation falling back markedly. There will also likely be, he says, a gradual pick-up in pay in both the private sector and the public sectors.
It’s hardly a full return to “feel good Britain”, still less a runway boom. But we could be entering 2018 with rather more momentum than that miserable OBR forecast would suggest.