8 Jan 2018 03:40pm

How bleak growth predictions affect the UK's future

Bleak revisions to the UK’s productivity and expected growth provided a gloomy backdrop to the 22 November Budget. What does it mean for the future?

The most striking feature of the latest Budget was not what Philip Hammond announced, but the downgrades for the UK economy that sharply hemmed him in and rewrote the prospects for the next decade in much bleaker terms.

The good news is that forecasters expect even more people to be in work; employment levels have more than held up. But real wages are under pressure after a rise in inflation, bringing an end to the recovery that had lasted through 2014 to the first half of 2016. The astonishing outlook is that household earnings may not have returned to the levels before the 2008 crisis until 2022 – more than a decade of impact on living standards.

Over all this, too, hangs a Brexit-shaped cloud of uncertainty. If, as some think, only a Canada-style trade deal will be on offer from Brussels in 2018, it will cover mainly goods and not services, which make up 80% of the economy. In that case, more downgrades may be coming. The chancellor’s room for manoeuvre shrank in the weeks before the 22 November Budget. The Office for Budget Responsibility (OBR), set up to provide independent forecasts of the economy and the impact of government spending on national finances, sharply downgraded estimates of productivity. It had underperformed estimates for seven years and it was not prudent to do otherwise, it said. Instead of productivity growing at around 1.7% per year, as it expected as recently as March, growth would be only around 1% per year (and the Institute for Fiscal Studies points out that the post crisis rate has been around 0.3%).

Why? The OBR has brought into mainstream debate something that was already a matter for fierce discussion among economists and politicians. Analysts warn of giving into the “OBE tendency” – one big explanation for this puzzling phenomenon – but the UK has been struggling for years to raise productivity, which measures output per hour worked. The UK has clearly kept a lot of people in work but in low wage jobs; some argue that that points to under-investment in technology, although others argue that more investment would simply make those workers redundant. The retort in turn is that the UK needs to invest more and improve its education system – though London has improved after nearly two decades of money and attention, regional standards vary widely. Others argue that the competitiveness of the UK is under pressure and this affects the “value added” of its output.

The downgrades revise downwards expectations of economic growth to around 1.6% per year in five years time. That represents, the IFS says, a drop of 3.5% on forecasts in March 2016, worth £65bn to the economy. Plus, the deficit on government spending will still be running at around £25bn per year – assuming that £12bn of planned cuts to welfare payments are made, and that spending on public services other than health is squeezed by 6% in real terms.
That is not an end to austerity. Indeed, Treasury officials point out that while public demands for an end to cuts to public services and local government are rising, some of the most uncomfortable cuts were always due in the coming years.

The impact of Brexit is not yet clear in these figures, either. The UK economy has already slowed down under the impact of uncertainty, and its growth has slipped behind most other major economies and the eurozone (although growth in the latter, recovering from its own crisis, is perhaps less surprising). The question is not so much about the immediate future, given that the UK is attempting to secure a transition of at least two years beyond March 2019, during which time it wants trade to continue much as now. It is beyond that: whether businesses have relocated and investment slipped away.

The effect of that cannot be estimated now. But if this was a Budget dominated by revisions of the past decade’s performance, the outlook will be dominated even more by decisions on Brexit over the next decade.

Bronwen Maddox is director of the Institute for Government and a commentator and broadcaster