The person making the news yesterday was not the chancellor, it was the chairman of the Office for Budget Responsibility (OBR), Robert Chote. Mr Chote and his colleagues finally lost patience with their own continued overoptimism on productivity growth and delivered a pretty grim set of forecasts. They no longer see productivity growth climbing towards its pre-crisis levels. They foresee economic growth struggling up to only 1.6 per cent a year by the early 2020s rather than the 2 per cent they had previously forecast.
All this provided a deeply uncomfortable background for a chancellor under pressure to meet all sorts of spending demands. In the bad old days, when chancellors were able to manufacture their own economic forecasts, some of this might have been fudged. So, as wrong as its forecasts may turn out to be, the OBR played its assigned role in keeping the numbers honest. Three cheers for that.
Not that there would have been any cheers in the Treasury. Forecasting changes raised projected borrowing in 2019-20 by £9 billion and by nearly £18 billion in 2021-22. On top of that, policy measures announced yesterday add an extra £9 billion of borrowing in 2019-20. Remember George Osborne’s March 2016 budget? It was projecting a surplus of £10 billion in 2019-20. We are now heading for a £35 billion deficit. That’s quite a turnaround. Part of that results from forecasts of poorer growth. A good part of it reflects spending decisions — more for prisons and infrastructure in last year’s autumn statement, more for social care in the March budget, more for health and housing this time. The spending plans of two years ago always looked too tight to be credible and so it has proved.
Not that the taps have been turned on. Not by any means. There are still some big cuts to come across many public services and social security benefits too. If there is a strategy then it appears to be to let pressures grow until they become unsustainable and then apply a sticking plaster.
That is a little unfair on Philip Hammond’s choices overall. Despite all the pressures for increasing spending on immediate priorities — health, schools, welfare, pay — he has found money for (hopefully) productivity-enhancing investment in infrastructure, R&D and housing. The impacts will not be immediate and will be hard to discern. Under the circumstances this is a brave and welcome focus on the long run.
Less creditable, and less credible, are the published plans beyond 2020. All those needs for extra cash suddenly disappear and spending gets squeezed. Budget decisions increase borrowing by £9 billion in 2019-20 but reduce it by £3 billion in 2022-23. That flatters the numbers in later years.
That is one reason why the chancellor’s target to eliminate the deficit entirely by the mid-2020s looks increasingly implausible. The demands of a growing and ageing population, alongside the pent-up demands from public services starved of cash for a decade, would have made sure of that. Layer on higher borrowing and the possibility of weaker economic growth persisting, and achieving budget balance looks all the more difficult.
If Mr Chote and colleagues are right, and low growth continues, then gloom should not be confined to the Treasury. On the new forecasts, real earnings growth will be almost non-existent for the next two years, and horribly weak thereafter. We will all have to get used to the idea that steadily rising living standards may be a thing of the increasingly distant past.
I sincerely hope, though sadly do not believe, that the OBR has turned far too pessimistic. If it is right we had better gird ourselves for yet more tough times ahead.
Paul Johnson is director of the Institute for Fiscal Studies, follow him at @PJTheEconomist. This article was first published by The Times and is reproduced here with permission.