I have some sympathy for the position the Chancellor is in as a result of his predecessor’s lax attitude to balancing the budget and the electorate’s decision to leave the EU. Whether or not leaving the EU will be beneficial in the long run, it will certainly make things more difficult in the short run and particularly in 2017.
The Chancellor has blamed Brexit for the OBR’s forecast revisions. It actually accounts for only a fraction. The rest is due to the fact (as Cebr pointed out at the time) the forecasts were over optimistic when they were made. Of the 12 forecasts that the OBR has made, they have been less accurate than Cebr on 11 occasions. We think we are pretty good at forecasting but there must be some other factor at work. The OBR remains over optimistic, predicting 1.4% growth next year when we expect only 0.7%. The gap between their forecasts and ours continues in the years ahead.
My main criticism of the Chancellor is that he has done very little to boost growth. His housing and infrastructure packages make sense. But his R&D fund is unlikely to do much other than to provide welfare for unemployed scientists – Britain’s biggest tech success, the Flat White Economy, managed to happen without any government funding at all. His failure to cut Corporation Tax and the higher rates of Stamp Duty are unfortunate.
In the past the OBR’s over optimistic forecasting has actually been an advantage because it enabled George Osborne’s Budgetary policies to be presented as austerity and so kept bond yields down. But the forecasts now are part of the problem. The chart shows why. If you take Cebr forecasts (which are traditionally more accurate) with Hammond’s policies, the Budget deficit hardly falls at all in the medium term. This means that the ratio of public debt to GDP rises to about 90% (which is the normal red line level on the rev counter) and stays there.
If you or I went to our bank manager with a business plan that said we wanted to finance our lifestyles by borrowing for ever and hadn’t even got a plan for making a serious dent in our borrowing let alone paying back any debt we would be unlikely to get a good hearing.
But governments play by different rules and can keep borrowing as long as they can do so in their own currency and people keep confidence. There are only two difficulties – bond yields will almost certainly have to rise – perhaps nearly tripling to 4% on the 10 year bond. And if anything else goes wrong, there is now no safety net.
Government borrowing, £ bn
Douglas McWilliams
President
Direct: +44 (0)20 7324 2860
Switchboard: +44 (0)20 7324 2850
Email: DMcWilliams@cebr.com