OBR October 2018 Economic and fiscal outlook
8th November 2018
Robert Chote, the chairman of the Office of Budget Responsibility (OBR), distils the key messages from the October 2018 Economic and fiscal outlook.
Overview of the October 2018 Economic and fiscal outlook.
At first glance the outlook for the public finances in the medium term looks much the same as it did in March. But this masks a significant improvement in the underlying pace of deficit reduction, that on its own would have put the Government on course to achieve its objective of a balanced budget for the first time. As it happens, this underlying improvement had already been swallowed up by the Prime Minister's promise of higher spending on the NHS made in June. The remaining Budget policy measures are a further near-term giveaway that gradually diminishes over the forecast, leaving the deficit in 2022-23 little changed overall.
The public finances have performed better so far this year than we and outside forecasters expected back in March, even though the economy has grown less quickly. Once again, the ONS has revised last year's budget deficit lower, relative both to its initial estimate in April and to our forecast from March. Borrowing has also fallen more sharply in the first half of 2018-19 than anticipated, relative to the same period last year. As a result - and before the impact of any policy decisions - we have revised borrowing £11.9 billion lower for the full year (like for like), creating a more favourable starting point for the forecast. This reflects stronger tax revenues and lower spending on welfare and debt interest than expected.
The performance of the real economy has been less impressive relative to expectations. We have revised real GDP growth in 2018 down from 1.5 to 1.3 per cent, but primarily due to the temporary effects of the snowy first quarter. Thereafter we expect slightly stronger growth over the forecast as a whole than in March, reflecting a downward revision to our estimate of the sustainable rate of unemployment and an upward revision to potential labour market participation, reflecting new data on participation by age that we flagged back in July.
The upward revision to cumulative GDP growth means that the underlying improvement in the budget deficit rises from £11.9 billion this year to £18.1 billion by 2022-23. At 0.6 per cent of GDP, on average, this is the largest favourable underlying forecast revision we have made since December 2013, but only the sixth largest we have made in either direction since 2010. On its own, this would have been sufficient to achieve a budget surplus of £3.5 billion in 2023-24, meeting the ‘fiscal objective' of balancing the budget by 2025.
But the Budget spends the fiscal windfall rather than saving it. Most significantly, it confirms funding for the NHS settlement announced in June, the cost of which rises from £7.4 billion in 2019-20 to £27.6 billion in 2023-24 in gross terms and from £6.3 billion to £23.4 billion adjusting for the boost it gives to nominal GDP. The rest of the package has the familiar Augustinian pattern of a near-term giveaway followed by a longer-term takeaway, increasing borrowing by £5.3 billion in 2019-20 but reducing it by £0.2 billion by 2023-24.