MNI INTERVIEW: OBR To Cut Trend GDP, Make UK Fiscal Job Harder

The UK’s Office for Budget Responsibility is likely to reduce its forecast for trend GDP growth to around 1.5% when scoring the Nov 26 budget, making government fiscal targets harder to meet, National Institute of Economic and Social Research Deputy Director Stephen Millard told MNI.

The OBR will probably cut its trend growth forecast by 0.25 percentage points from 1.75%, Millard said in an interview.

"If I were to guess where the OBR are going to come down to, it's not going to be any lower than 1.5%," he said, noting that a quarter-of-a-percentage-point cut would make a big difference to the fiscal forecasts. 

In the March Budget, the OBR published a scenario in which productivity growth, rather than rising to its estimated trend of 1.3% in 2029-30, gets stuck a percentage point lower at 0.3% per year. That would have resulted in debt-to-GDP being 6.9% percentage points higher at the end of the forecast, at 89.6%.

Many analysts already consider the OBR’s estimate of trend productivity to be too optimistic, and a significant downgrade next month is widely expected. However, Millard noted that a lower GDP forecast would have similar fiscal implications, and that doubts over the reliability of labour market data might make the OBR more cautious about its productivity estimates.

"I think what they will say is something along the lines of 'given the uncertainty over the labour market, given uncertainty over the labour market data, we think trend productivity is in a range'," Millard said.

DATA DISCREPANCIES

"If you don't have a good estimate of employment growth or productivity growth ... then maybe just jump straight to the GDP, which you know is fairly well measured, and then ask yourself, 'is my assumption about GDP growth reasonable in light of the GDP data'?" he said.

"The OBR don't care about productivity, per se. What they care about is GDP.”

Confusion has been fed by a discrepancy between Labour Force Survey data, which showed total hours worked in the four quarters through Q2 rose faster than output, pushing productivity lower, and payrolls results, which have employment falling and a jump in productivity.

With Chancellor of the Exchequer Rachel Reeves believed to be considering an end to the government’s spring statements, OBR forecasts will not reflect lower borrowing costs from any enhanced fiscal credibility after this year's budget measures until late 2026, noted Millard.

NIESR head David Aikman has argued that the government needs to not only start running budget surpluses to keep debt-to-GDP steady but must come up with a credible strategy to get it on a downward trajectory if it is to avoid market disappointment. (See MNI INTERVIEW: UK Debt Stabilisation Insufficient - NIESR Head)