Background Briefing: The OBR Forecasts and the Spring Statement

Overview

Today, the Chancellor presented his Spring Statement in response to the Office for Budget Responsibility’s (OBR) Economic and Fiscal Outlook. The statement came in the wake of comments by the Prime Minister that Brexit would lead to a lessening of the UK’s trade relationship with the EU.[1] It also came just days after publication of the Government’s secret Brexit impact analysis[2], which showed that Brexit under every scenario would make the UK worse off.[3]

This briefing outlines Open Britain’s views on the Chancellor’s statement and an assessment of the OBR document. It also considers analysis from other organisations about the impact Brexit is already having on the economy. 

 

Top lines

  • Thanks to Brexit, the Chancellor is presiding over what promises to be the worst five years for our economy since the war. Today he confirmed growth will be5% or below for the next five years – far slower than was being forecast two years ago.
  • This is the first time a UK government has knowingly embarked on a policy that it knows will make our country poorer.
  • The Government’s own secret impact analysis shows that leaving the Single Market means the UK will need to find an additional £55bn in borrowing by 2033.
  • The Brextremists promised us an additional £350 million for the NHS paid for out of our contributions to the EU yet we now know that if Brexit goes ahead we’ll be paying money to the EU until 2064 and there won’t be an extra penny for our heath service.
  • UK export growth is expected to flatline by 2022, and the Government’s secret analysis revealed the fact that new trade deals won’t come close to compensating for the costs of Brexit.
  • As the economic cost of Brexit continues to bite, with falling real wages we are all entitled to ask whether this is the right path for the country.

 

Key points highlighted by the OBR

Economic growth

  • The OBR makes clear that Brexit is impacting on growth: “the vote to leave the European Union appears to have slowed the economy”[4].
  • Economic growth forecasts have been revised down in comparison with pre-referendum forecasts. The OBR puts growth decreasing to 1.7% in 2017, 1.5% in 2018, and 1.3% in 2019 and 2020, respectively.[5]
  • This contrasts with pre-2016 referendum forecasts of 2.2% for 2017 and 2.1% for all three years in the 2018-2020 period.[6]
  • Additionally, in comparison to the 2017 Autumn statement, the long-term forecasts for 2021 and 2022 have each been revised down from 1.5% and 1.6% to 1.4% and 1.5%, respectively.[7]

 

Investment

  • Investment is also down, in comparison with previous forecasts, with the OBR noting that “by the end of 2017, business investment was almost 6 per cent lower than our March 2016 forecast and the Bank of England has estimated that Brexit uncertainty has directly lowered business investment by 3 to 4 per cent.”
  • Moreover, the OBR expect investment growth to “remain subdued in the face of Brexit-related uncertainty.”[8]

 

Trade

  • Today’s outlook by the OBR makes for sober reading. As in November, the OBR has assumed that “the negotiation of new trading arrangements with the EU and others slows the pace of

import and export growth over a 10-year period.”[9]

  • Export growth forecast to slow this year and flatten off altogether by 2022 “as growth in UK exports eases and Brexit weighs on the UK export market share.”[10]
  • Import growth is also expected to slow due to Brexit.[11]

The divorce bill

  • According to the OBR the UK will be making payments to the European Union as part of the “Brexit bill” until 2064 totalling €41.4bn (or £37.1bn at today’s exchange rates), including £16.4bn by the end of 2020.
  • In return we will get a worse relationship with the EU than we enjoy today.

Cost of Brexit preparations

  • The Chancellor today committed £3 billion over the next two financial years to “helping departments and the devolved administrations to prepare”. The breakdown of how this funding has been allocated can be viewed here.
  • No funding has been provided to the Ministry for Housing, Communities and Local Government[12] despite the imminent loss of both EU structural funds as well as funding through the European Investment Bank.
  • The Home Office will receive an additional £395m over the next two years for preparing for Brexit. This would have been enough to train and pay for an additional 4,400 police officers.

 

Other recent economic news

  • OECD: Before the referendum Britain led the G7 economies in economic growth; now we are not only bottom of the G7 but also of the G20, according to latest OECD projections from 13 March 2018.[13]
  • Institute for Government: The Institute for Government published a paper on 12 March which showed that the additional work required for civil servants to take-on due to Brexit, is likely to amount to £2bn by the time the UK leaves the EU in March 2019.[14]
  • Government’s Brexit analysis: According to last week’s published analysis on the cost of Brexit by the Government. All the scenarios looked at have one thing in common: we will all be worse off if Brexit takes place. Leaving the Single Market means the Government will need to find an additional £55bn in borrowing by 2033. A no deal scenario would equate to a 7.7% hit to GDP by 2033.[15]
  • ONS: Hopes that the weak pound since the referendum would increase exports, giving an economic uplift to offset a downturn in consumer spending, took yet another knock with the latest January 2018 trade figures. The trade deficit in goods increased further, to £36.5bn in the three months to January 2018, with goods imports increasing by 1.7% and exports decreasing by 1.3%.[16]

 

[1] https://blogs.spectator.co.uk/2018/03/theresa-mays-our-future-partnership-speech-in-full/

[2] https://www.parliament.uk/documents/commons-committees/Exiting-the-European-Union/17-19/Cross-Whitehall-briefing/EU-Exit-Analysis-Cross-Whitehall-Briefing.pdf

[3] https://www.politico.eu/european-council-art-50-23-march-2018-draft-guidelines/

[4] http://cdn.obr.uk/EFO-MaRch_2018.pdf p 5

[5] Ibid p 10

[6] https://twitter.com/resfoundation/status/933316144366276609

[7] https://www.theguardian.com/business/live/2018/mar/13/spring-statement-philip-hammond-growth-borrowing-brexit-live-updates

[8] http://cdn.obr.uk/EFO-MaRch_2018.pdf p 52

[9] Ibid, p 36

[10] Ibid, p 74

[11] Ibid p 74

[12] http://www.parliament.uk/business/publications/written-questions-answers-statements/written-statement/Commons/2018-03-13/HCWS540

[13] http://www.oecd.org/eco/outlook/Getting-stronger-but-tensions-are-rising-presentation-oecd-interim-economic-outlook-march-2018.pdf

[14] https://www.instituteforgovernment.org.uk/publications/costing-brexit-what-whitehall-spending-exiting-eu

[15] https://www.parliament.uk/business/committees/committees-a-z/commons-select/exiting-the-european-union-committee/news-parliament-2017/cross-whitehall-briefing-published-17-19/

[16] https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/bulletins/uktrade/january2018