THE economy will grow by less than expected – amid a productivity crisis, the Treasury watchdog warned.
The Office for Budget Responsibility cut its growth forecasts for the next five years. It expects gross domestic product to rise by an average of just 1.4 per cent a year between now and 2022 amid weak productivity growth and uncertainty over the economy.
The downgrades threaten to blow a hole in public finances, forcing the Chancellor to tear up plans to eliminate the deficit by the middle of the next decade. But the OBR was accused of being too pessimistic last night.
Economists and Brexit supporters argued the outlook is brighter than feared. Ex-chancellor Lord Lamont said: ‘I would not be surprised if the OBR’s figures turned out to be wrong.’ The Ernst & Young Item Club said the OBR was ‘erring on the side of caution’ and may be ‘overly pessimistic’.
Striking a positive note in the Budget, Mr Hammond said the economy had managed to ‘confound those who seek to talk it down’, by creating jobs and continuing to grow. The OBR cut growth forecasts for this year from 2 to 1.5 per cent and downgraded 2018 from 1.6 to 1.4 per cent and 2019 from 1.7 to 1.3 per cent. It expects growth of 1.3 per cent in 2020, rather than the 1.9 it pencilled in at the Spring Budget, and cut its 2021 forecast from 2 to 1.5 per cent. Growth is expected to rise to 1.6 per cent in 2022.
It is thought to be the first time in modern history that the official GDP growth forecast is below 2 per cent for every year over the forecast horizon.
The OBR said the ‘main reason’ was ‘a significant downward revision’ to the productivity outlook. Productivity is the main driver of living standards, pushing up wages and tax receipts. In March, the OBR said it expected productivity growth to rise to 1.9 in 2021. But it now expects no productivity growth at all this year before it slowly rises to 1.3 per cent in 2021.
OBR chairman Robert Chote said this ‘does not bode well’ – and said the crisis goes back to before the banking crisis. Asked if Brexit had played a role, he said: ‘Not in this forecast.’
Professor Patrick Minford, of Economists for Free Trade, said they were ‘absurdly depressed forecasts’, adding: ‘The medium to long-term economic outlook…is much brighter than the Chancellor has set out.’
Tory MP Jacob Rees-Mogg said OBR forecasts were ‘subject to considerable margin of error’.