Budget 2016: UK growth prospects slashed as Osborne flags 'dangerous cocktail'Comments Off on Budget 2016: UK growth prospects slashed as Osborne flags 'dangerous cocktail'
The UK’s growth prospects were slashed and borrowing soared by more than £30 billion as the Chancellor’s fiscal watchdog delivered a damning verdict on the nation’s productivity performance.
George Osborne – battling with a “dangerous cocktail” of risks which has left its scars the public finances – said the Office for Budget Responsibility had revised down its estimates of UK productivity, which has struggled to regain its pre-recession momentum nearly a decade after the financial crisis.
The “highly uncertain” verdict on the UK’s productivity potential – effectively taking more hours to produce the same or less – nonetheless hits the UK’s estimated growth rates in the years ahead.
The OBR’s forecast of 2.4% growth for 2016 and 2.5% in 2017 were revised down to 2% and 2.2% respectively and will drop to just 2.1% every year for the rest of the decade.
Osborne said volatile financial markets, turbulence in the Middle East and a Chinese slowdown – the cocktail he referred to in January – are feeding into slower global growth.
“The question is how they will implement the massive tightening that is required.”
“Britain is not immune to slowdowns and shocks,” the Chancellor said. But the UK’s tax take has also been hit by falling inflation and oil prices, while uncertainty building up to June’s vote on EU membership also threatens the economy.
The Chancellor undershot this year’s borrowing target – £73.5 billion – due to the impact of lower inflation, but cumulatively borrowing is estimated to be £33 billion higher in the years to 2019/20.
In 2019/20, the Chancellor is aiming for a surplus of £10.4 billion – a £31.8 billion swing compared to the deficit of £21.4 billion pencilled in for 2018/9. “The question is how they will implement the massive tightening that is required,” Oxford Economics economist Martin Beck said.
Osborne also missed his target of cutting the UK’s debt as a share of GDP for the second time after he temporarily abandoned it in 2012. Debt as a share of GDP will rise this year to 86.2% instead of falling.
Despite the worsening fiscal picture, the Chancellor’s interest bill on its index-linked debts will fall due to lower inflation, which was cut to 0.7% and 1.6% in 2016 and 2017 respectively.
Interest rates are not expected to rise until the end of 2018, which also brings down the UK’s cost of borrowing.
There was an early fillip for the Chancellor as the number of people in work rose 114,000 in the quarter to January, keeping the unemployment rate a 5.1% – the lowest for a decade.
Official pay figures showed annual pay growth up from 2% to 2.2% in the quarter to January.