Investment Clock insights

Improvement in public finances down to one off factors

Ian Kernohan

8 March 2017

The UK economy has been much more resilient than expected in the wake of the Brexit referendum.  The Office for Budget Responsibility (OBR) has recognised this by revising up their GDP growth forecasts for this year, in line with the new Bank of England forecast, to a punchy 2%. 

GDP growth is expected to slow to 1.6% in 2018 and looking beyond that, OBR growth forecasts are a tad lower than their November forecast, although the level of GDP in 2021 is projected to be the same as in the Autumn Statement. 

There is little sense here that the OBR believes that Brexit will be a significant headwind to growth, despite the Prime Minister’s stated aim of leaving both the Single Market and Customs Union, however their GDP forecasts look modest enough to offer some room for upside surprise.  
Tax receipts have been higher and spending lower than the OBR expected in November, so the budget deficit has been revised lower, to £51bn in the current fiscal year.  At 2.6% of GDP, this is a much stronger position than the 10% deficit which the coalition government inherited in 2010.  

The OBR has deemed any improvement in the public finances as down to one off factors, so there was little room for any major change in the fiscal stance at this point. 

That said, the Chancellor still has some room for extra borrowing, thanks to the new fiscal rules introduced last year.  He has taken the decision to save this modest honey pot, in case the Brexit process causes a much larger than expected hit to economic growth.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.