Autumn Statement 29 November 2011
Economic background
One of George Osborne’s first actions on becoming Chancellor was to establish the Office for Budget Responsibility (OBR) to provide an independent view of government finances. The OBR’s view is that the Chancellor’s 2010 plan is now off-target and the UK’s finances will not be back in balance by 2014/15, as Mr Osborne (and the OBR) said in March. Instead the plan has slipped by two years, taking the break-even date to beyond the next election. Thus the Chancellor has been forced into an effective extension of his plan, announcing reductions in total managed expenditure of 0.9% a year for the two years after the end of the current spending review period (2014/15).
The blame for the fiscal deterioration is largely down to disappointing economic growth. In turn, the Treasury attributes the lower growth to:
- Higher than expected inflation, driven by a sharp increase in global commodity prices. The OBR believes this to be the main reason for slower than expected economic growth since the June 2010 Budget;
- The eurozone crisis, which is feeding through to household and corporate spending decisions and to tighter global credit conditions; and
- The persistent impact of the 2008/09 financial crisis, which has destroyed more productive capacity than the OBR (and others) originally thought to be the case.
The OBR now expects 2011 and 2012 to produce just 0.9% and 0.7% annual growth, compared with forecasts it made in March of 1.7% and 2.5%. However, for 2015 and 2016 the OBR projects that growth will be 3% a year – an indication of the eventual bounce back needed even for the newly extended plan to work.
In the interim, unemployment is expected to increase to 8.7% next year before falling back to 8% in 2014, below the current level of 8.3%. The combination of high unemployment and low growth will lead to increased expenditure and reduced tax income. For 2015/16, the OBR expects the resulting rise in borrowing during the year to be £24 billion.
If there is one piece of good news amid the prolonged period of austerity, it is that the OBR shares the Bank of England’s view that inflation will fall sharply. The OBR’s projections are that inflation (CPI) will be down to 2.7% in 2012 and 2.1% in the following year.
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