Spring Budget: Economic Outlook
As is customary for an annual Budget, Hunt started his statement with a summary of the OBR’s Economic and Fiscal Outlook report, which it published the same day.
The OBR’s biannual report is a forecast of the UK economy that uses the changes to fiscal policy announced in the Budget to present a five-year outline of the future.
The economic forecast shared similar themes to the one the OBR released late last year – high inflation, contracting GDP, falling living standards – but owing to lower-than-expected wholesale energy prices, the outlook is more positive than before.
"The economic and fiscal outlook has brightened somewhat since our previous forecast in November”, the OBR wrote.
The UK narrowly avoided a recession in Q4 2022, according to the OBR, but GDP will contract by 0.2% in 2023, markedly more positive than its previous forecast of a 1.4% fall in GDP. Furthermore, the UK will technically avoid a recession according to OBR data, which is defined as two successive quarters of economic decline.
GDP growth is then set to pick up to 1.8% in 2024 and 2.5% in 2025 “as interest rates start to fall and drops in energy and other tradable goods prices take inflation below the [Bank of England’s] 2% target”.
Inflation peaked at 11.1% in October 2022 and will “fall sharply” to 2.9% by the end of 2023, a more rapid decline than the OBR expected in November, owing to a fall in gas and electricity prices, and an easing of supply bottlenecks.
Inflation for 2023 will average out to 6.1% – 1.2 percentage points lower than the OBR’s November forecast – before dropping to 0.9% in 2024, down to zero through to mid-2026 before returning to 2% by 2028.
The OBR warned:
“The average of past forecast errors is not always a good indicator of the degree of uncertainty at specific points in time, especially following very large shocks such as last year’s energy price rises”.
Real household disposable income, meanwhile, is expected to fall by a total of 5.7% over the 2022/23 and 2023/24 financial years. Although this is 1.4 percentage points less than forecast in November, it would still be the largest two-year fall since records began in 1956-57.
The unemployment rate is expected to “rise modestly” as growth weakens to a peak of 4.4% (1.5m people), which is lower than the peak of 4.9% previously forecast due to “the improved outlook for real GDP in the near term”.
The labour supply has worried the Government for a time now, with the participation of workers aged 16 to 64 falling from 64% in 2019 to 63.2% in 2022. In its central forecast, the OBR predicts the participation rate will fall slightly in the next two years before rising back to 63% in 2027. In the upside scenario, participation recovers quickly and ultimately rises to 63.9% in 2027.
On public sector net debt, the measure that includes debt owned by the Bank of England, the OBR predicts that Government borrowing will rise from 100.6% of GDP in 2022/23 and peak at 103.1% the following year. It then declines in the final four years of the forecast, falling to 96.9% of GDP in 2027/28.
According to the Government’s own fiscal rules, underlying debt must fall as a percentage of GDP by the fifth year of a rolling five-year period. Debt must also be below 3% of GDP in the same year, which the OBR said the Government will meet with a £39.2bn margin.