The Office for Budget Responsibility (OBR) is poised to significantly revise its economic growth forecast, potentially adding pressure on Chancellor Rachel Reeves to address fiscal challenges in the upcoming Spring Statement. This comes amid concerns about the UK’s economic performance following Labour’s first six months in power.
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OBR Expected to Downgrade Growth Projections
Economists anticipate the OBR will lower its growth projections for 2024 and 2025, reflecting the economic stagnation experienced during the latter half of 2024. Andrew Goodwin, chief UK economist at Oxford Economics, expressed skepticism about achieving the OBR’s current forecast of 2% growth for 2025, citing the need for consistently strong quarterly growth.
Ruth Gregory, an economist at Capital Economics and former OBR analyst, also anticipates a downgrade, suggesting the 2024 forecast could be revised from 1.1% to around 0.7%, and the 2025 forecast from 2% closer to the consensus of 1.3%. This potential revision underscores the challenges facing the UK economy.
Concerns Over National Insurance Increase
Former OBR and Bank of England official, Sir Charlie Bean, criticized Chancellor Reeves’ decision to increase the National Insurance bill for employers by £25bn in the October Budget. He argued that lowering the threshold at which employers pay National Insurance from £9,100 to £5,000 will likely lead to job losses and hinder efforts to address the UK’s worklessness crisis.
Sir Charlie highlighted the potential negative impact on low-wage sectors like hospitality and care, where employers may be forced to reduce staff due to the inability to lower wages below the legal minimum. He also expressed concern that this policy would make it more difficult to encourage economically inactive individuals back into the workforce.
Potential Fiscal Measures and Market Response
The downward revision in growth forecasts, coupled with rising borrowing costs, has significantly reduced the Chancellor’s fiscal headroom. This has fueled speculation that Ms. Reeves may need to consider tax increases or spending cuts to maintain fiscal stability. Capital Economics estimates the Chancellor’s headroom has shrunk to a mere £3bn, the lowest on record.
However, the Bank of England’s anticipated interest rate cut on Thursday could provide some relief. Any indication of faster rate cuts could ease pressure on the Chancellor and potentially boost market confidence.
Treasury Response and Future Outlook
The Treasury has reaffirmed its commitment to sound public finances and economic stability, emphasizing the non-negotiable nature of its fiscal rules. However, the upcoming Spring Statement will be closely watched for any indication of how the government plans to address the economic challenges and the potentially reduced fiscal headroom. The OBR’s official forecast, due on March 26th, will provide a clearer picture of the UK’s economic outlook and inform the government’s fiscal strategy. The Chancellor’s response to the OBR’s forecast will be crucial in determining the direction of the UK economy in the coming months.
