overview
The economic backdrop to the Autumn Statement was not as bad as might have been expected from a reading of the March 2023 projections by the Office for Budget Responsibility (OBR). In the spring, the OBR’s first Economic and Fiscal Outlook of 2023 envisaged that the government would borrow £131.6 billion. Seven months into the financial year, the OBR’s projection has dropped by about £16 billion because of stronger than expected tax revenue, giving the Chancellor some extra wiggle room.
This tax windfall owes much to the impact of both price inflation and earnings growth being higher than projected in March. Back then the OBR had suggested that CPI annual inflation would fall to around 3% in the final quarter of 2023 against its latest projection of about 4.5%.
The higher-for-longer combination of inflation, earnings growth and interest rates has brought some significant changes to the OBR’s projections for the economy:
- The OBR forecast says inflation will not now fall to 2% until the second quarter of 2025, a year later than previously forecast.
- The outlook for economic growth in the short term has improved, with +0.6% expected for 2023 against a 0.2% contraction in the March forecast. However, the OBR’s growth projections for 2024 and 2025 are both 1.1% lower than their March figures.
- Ten-year government bond yields at 4.5% are 1.2% higher than the OBR’s March projection. The OBR has now added this figure to its previous projections of government borrowing costs for the entire five-year forecast period. Base rate is now expected to average about 4% in 2027/28, just over 1% above the March projection.
- Government borrowing is projected to be £84.6 billion in 2024/25 and eventually to drop to just below £50 billion in 2027/28. But total government debt will then amount to £2,947 billion (93.2% of GDP) costing £98.4 billion a year to service.
The OBR says the Chancellor will meet his fiscal goal in 2028/29 by £13 billion (0.4% of GDP), double the amount it projected in March. That margin could prove a challenge to maintain for the next government.