NIESR: A Balanced Budget approach to the Risks posed by Brexit
Dr. Garry Young, Director of Macroeconomic Modelling and Forecasting and Amit Kara, Head of UK Macroeconomic Forecasting have issued the following statement reacting to today’s Budget announcement:
GDP growth averages only 1.4% over the next 5 years according to the OBR’s new forecast. This is a cautious forecast that is below NIESR’s latest projections that were published in early-November. Like us, the OBR has revised its real GDP growth forecast to lower levels because of downward revisions to potential productivity growth. On these forecasts, UK economic growth will continue to lag behind the OECD, as we pointed out in our November Review.
There are risks to either side of the output forecast. The uncertainty around Brexit presents the most important downside near term risk to the economy, particularly in the event of an exit involving a sudden stop, while the judgments on productivity and employment are likely to represent the most significant upside risk to productivity, as well as the prospects for a sustained world recovery.
The projections for the fiscal deficit had deteriorated significantly since March. This revision is in spite of better-than-expected recent outturns and because of weaker GDP growth prospects and some modest relaxation of fiscal consolidation. As a result, around half of the fiscal headroom that was available to the government under the ‘fiscal mandate’, which requires the government to achieve a structural deficit below 2 per cent by 2020-21, has been wiped out. Even so, the Chancellor has maintained a relatively tight fiscal position by resisting the temptation to use up all the space afforded by this fiscal rule. We think this is a prudent and sensible response to the risks posed by Brexit uncertainty.
The outlook for net debt is roughly the same as in March as the effect of higher borrowing has been offset by fresh plans to sell RBS shares and also because of a change in the treatment of housing associations in the data.
Notes for editors:
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