Government will struggle to hit fiscal target, says watchdog

The Office for Budget Responsibility (OBR) said that smaller deficit falls in four years’ time, coupled with cost pressures from an ageing population, meant the Chancellor was unlikely to meet his fiscal target of shifting the public finances back into the black “at the earliest possible date in the next Parliament”.

Speaking after Philip Hammond’s Spring Budget, OBR chairman Robert Chote said it could not make a definitive judgment on the target, but “it does look unlikely that the Government will achieve this on current policy settings”.

He said the watchdog’s central forecast predicted the Government would still be running a deficit of 0.7 per cent of GDP in the first year of Parliament in 2021/22.

The challenge facing Mr Hammond was laid bare yesterday as the OBR sounded the alarm over an imminent squeeze on consumer spending triggered by rising inflation from the Brexit-hit pound.

It confirmed that stronger-than-expected consumption was behind the UK’s economic resilience following the Brexit vote, but said consumers were now taking on more debt or plundering their savings in order to keep spending.

Asked whether consumption growth was fuelled by consumers raiding their nest-eggs, OBR committee member Sir Charlie Bean said: “Implicitly yes.”

“The savings ratio has fallen very substantially and is back at the sort of levels that we saw very early on in the financial crisis.

“Consumer credit growth has been relatively strong for instance,” he added. “But equally some households will have been running down savings.

“But the most important thing is that is not sustainable.

“Consumption growth at this sort of rate is only going to be sustainable if real income growth picks up which, in turn, needs productivity growth.”

The comments came as Mr Hammond was handed a double boost ahead of Britain’s imminent divorce from the European Union, as forecasts revealed a short-term upgrade to UK growth and a fall in Government borrowing.

In its latest independent forecasts, the OBR revised up its outlook for UK gross domestic product (GDP) this year from 1.4 per cent to two per cent.

But the fiscal referee painted a more gloomy long-term picture, downgrading next year’s growth from 1.7 per cent to 1.6 per cent and slashing forecasts for 2019 from 2.1 per cent to 1.7 per cent, before predicting 1.9 per cent growth in 2020 and two per cent in 2021.

Delivering his Budget statement, the Chancellor said the Government “must focus relentlessly on keeping Britain at the cutting edge of the global economy”.

On the public finances, the OBR now expects borrowing in 2016/17 to come in £16.16 billion lower than autumn forecasts at £51.7bn.

It said the Government would rake in an extra £7.5bn in taxes thanks, in part, to stronger than expected corporation tax receipts.

Government spending had also been revised down by £6bn over the period.

“While the economic forecasts are broadly unchanged since the Autumn, the OBR has substantially revised down its short- term forecast of public-sector net borrowing,” Mr Hammond said.

“The OBR attributes this change to a number of one-off factors that they do not expect to lead to a structural improvement over the forecast period.”

The OBR also tweaked borrowing forecasts from £59bn to £58.3 bn for 2017/18, from £46.5 bn to £40.8 bn for 2018/19, from £21.9 bn to £21.4 bn for 2019/20, from £20.7 bn to £20.6 bn in 2020/21 and from £17.2 bn to £16.8 bn in 2021/22.

Outlining the outlook for debt, the Chancellor said it would rise to 86.6 per cent of GDP in 2017, peaking at 88.8 per cent next year, 1.4 percentage points lower than forecast in November, before falling to 88.5 per cent, 86.9 per cent and 83 per cent in subsequent years, reaching 79.8 per cent in 2021/22.

The OBR also upgraded its forecasts for inflation this year from 2.3 per cent to 2.4 per cent, before downgrading its predictions in following years to 2.3 per cent in 2018 and 2 per cent in 2019, with real wages rising in every year of the forecast.