The charts that tell the economic story of the Autumn Statement

Growth down, inflation up, real wages stagnant, borrowing higher, debt rising - and a major long-term economic hit from Brexit

Ben Chu
Economics Editor
Wednesday 23 November 2016 15:56
The chair of the Office for Budget Responsibility Robert Chote
The chair of the Office for Budget Responsibility Robert Chote

The Office for Budget Responsibility's latest forecasts, show a significant deterioration in the public finances relative to the OBR’s last forecast at the time of the March Budget.

A significant part of that deterioration is due to its estimate of the negative impact of Brexit – both the near-term impact of the vote to leave the European Union on 23 June and also the impact of the UK actually leaving the bloc in 2019.

But there are many different things going on in the forecast.

And here we tell the story in greater detail.

UK growth is slashed in Autumn Statement

Growth is lower…

The major GDP growth hit in the OBR’s forecast comes in 2017 and 2018 where GDP growth is downgraded to 1.4 per cent and 1.7 per cent respectively.

Overall the OBR estimates that the UK's GDP by 2020 will be around 1.4 per cent lower than it expected in March.

It ascribes this weakness, in part, to lower business investment, as firms rein in their spending due to the uncertainty created by the Brexit vote.

Inflation is higher…

Like other forecasters, the OBR expects the major depreciation of sterling since the 23 June Brexit vote to result in a spike in consumer price inflation in 2017 and 2018.

It thinks the rate will go over the Bank of England's 2 per cent target next year and peak at 2.5 per cent in 2018 before returning back to target by 2020.

Real earnings are squeezed…

The OBR expects that increase in inflation to squeeze the real terms purchasing power of people's wages.

But it also thinks that average pay growth in cash terms will also be much weaker than it thought in March.

In March it thought average earnings would rise by 3.5 per cent in 2017. Now it thinks they will rise by just 1.1 per cent.

The upshot is that the OBR thinks average real wage growth (average wage growth minus inflation) will slow to almost zero next year.

This is one of the other main reasons it thinks that GDP growth will slow down so sharply.

Household consumption accounts for around 60 per cent of GDP and consumers are likely to spend less in response to the squeeze on their real earnings.

Unemployment goes up...

The OBR, like the Bank of England, thinks the slowing economy in 2017 and 2018 will increase the rate of unemployment relative to March.

The jobless rate currently stands at just 4.8 per cent. But the OBR sees it rising over the next two years, peaking at 5.4 per cent in 2018.

Borrowing is greater….

In large part thanks to the slowing economy, the OBR thinks that public borrowing will be greater in every year of the forecast than in March.

George Osborne targeted a £10.4bn budget surplus in 2019-20.

But his successor, Philip Hammond, has completely ditched that.

Now public borrowing is expected to be £21.9bn in that year and even £20.7bn in the following year.

Over the whole five year forecast period the Government will borrow an additional £122bn relative to what the OBR forecast in March.

Debt is greater…

That extra borrowing automatically means the national debt is much bigger over the forecast period.

The OBR now expects the debt to GDP ratio to carry on rising until 2017-18 when it peaks at 90.2 per cent of GDP.

The impact by the end of the forecast period is stark. The national debt in 2020-21 is now forecast to be £1.95 trillion, up from £1.74 trillion in the March forecast.

Potential productivity growth is lower…

Perhaps the most important judgement from the OBR is its view of potential productivity growth - essentially the economy's maximum underlying growth rate.

Relative to March there has been big downgrade in every year.

And by 2021 potential productivity growth is still only 1.8 per cent, well below the 2.2 per cent average between 1971 and 2007.

Lower potential productivity growth means the UK will be permanently poorer than previously thought.

The true cost of Brexit...

So how much of this fiscal and economic damage is due to Brexit?

The OBR thinks around £59bn of the £122bn deterioration in the public finances by 2020-21 is due to Brexit and the underlying deterioration of the economy due to the June 23 vote to leave the EU.

That's around 47 per cent of the total.

And it breaks the negative impact down into various channels.

First, it assumes that lower inward migration to the UK hurts growth tax revenues.

Second, it thinks that being outside the EU contributes to our lower potential productivity growth.

Third, the Brexit vote will push up inflation.

Fourth, it thinks there will be cyclical downturn over the next two years (although not a recession).

Around 20 per cent (£26bn) of the total £122bn deterioration is due to the Government's decision to borrow more on top of that to help the economy grow and ease the squeeze on various households.

This includes some extra spending on government infrastructure, the cancellation of the rise in fuel duty, and the reduction in the rate at which the Universal Credit benefits are withdrawn.

A further £26bn of the deterioration is due to the underlying public finances simply being weaker than the OBR thought they were in March.

Register for free to continue reading

Registration is a free and easy way to support our truly independent journalism

By registering, you will also enjoy limited access to Premium articles, exclusive newsletters, commenting, and virtual events with our leading journalists

Already have an account? sign in

By clicking ‘Register’ you confirm that your data has been entered correctly and you have read and agree to our Terms of use, Cookie policy and Privacy notice.

This site is protected by reCAPTCHA and the Google Privacy policy and Terms of service apply.

Join our new commenting forum

Join thought-provoking conversations, follow other Independent readers and see their replies


Thank you for registering

Please refresh the page or navigate to another page on the site to be automatically logged inPlease refresh your browser to be logged in