The government’s official economic predictor has drastically reduced its projections for economic expansion in the next 24 months. It also cautioned that it may take until 2025 for inflation to reach the desired target of 2%.
The Office for Budget Responsibility (OBR) has released an updated financial evaluation to coincide with the autumn statement. According to the report, the chancellor has received a £27bn surplus in the budget due to a stronger economy this year. However, the OBR cautions that the forecast for the economy up until 2028 is more challenging than previously predicted in March when the budget was announced.
The Office for Budget Responsibility (OBR) reported that the Gross Domestic Product (GDP) is expected to increase by 0.6% this year, surpassing the previous prediction of a 0.2% decline.
Unfortunately, there will be slower growth than anticipated, with a projected 0.7% growth in 2024 and 1.4% growth in 2025. The previous forecast from the OBR in March had estimated a rebound to 1.8% in 2024 and 2.5% in 2025.
The Bank of England’s 2% inflation target is now not projected to be reached until the first half of 2025, which is a year later than previously predicted. The Office for Budget Responsibility (OBR) has stated that instead of an expected inflation rate of 0.5% next year, it will actually be 2.8%.
Unfortunately for those who own homes, the OBR has predicted that house prices will increase by 0.9% in 2023, but will then decrease by 4.7% in 2024 due to the prolonged presence of higher interest rates.
The government stated that if there is slower economic growth and higher inflation than originally predicted, it would have less flexibility in the next five years.
According to the OBR, Hunt allocated all of his £27 billion windfall towards reducing business taxes, increasing benefits in line with inflation, and implementing a 2p decrease in employee national insurance, set to begin on January 6th.
In 2023, the economy was stronger and produced higher tax revenues than expected. Additionally, lower interest rates reduced the government’s debt payments, giving them more room in their budget.
Hunt stated that implementing a strict resolution with government divisions, restricting their expenditures for the next five years, would aid in reducing the annual budget deficit for the following five years.
The current deficit of 4.5% of GDP is expected to decrease to 2.7% in 2025 and further decrease to 1.1% in 2028-29.
A number of economists have expressed disapproval towards the Treasury’s emphasis on decreasing the yearly budget deficit, rather than implementing strategies to stimulate economic growth, such as increasing public investments.
The Institute for Fiscal Studies (IFS) reported that a halt in the funding for public investments will have a detrimental effect on the economy’s future well-being.
The director of IFS, Paul Johnson, stated that the level of public sector investment in our country is significantly lower compared to similar countries, which is detrimental to economic growth.
Private businesses in the UK will receive a £9 billion pledge to permanently implement “full expensing”. This means that companies can deduct the cost of purchasing equipment and machinery from their profits, resulting in lower tax payments.
The OBR announced that this action would result in a £3bn growth in private sector investment. However, the reductions in business taxes are expected to lead to a loss of £20bn in income by 2028.
In the meantime, government programs that encourage employment, such as offering assistance with childcare expenses, have the potential to increase the workforce by 200,000 individuals by 2028.
Johnson shared on X (previously known as Twitter): “It’s quite impressive that the adjustments in benefits, as well as the childcare and other changes announced in the March budget, have been deemed by the OBR to result in a 200,000 increase in employment.”
He stated: “Many benefit changes that have led to more people working have primarily resulted in them taking on low-wage, part-time jobs while still receiving benefits.”