[PPT] - Economic and fiscal outlook 5 December 2013 Robert Chote Chairman PowerPoint Presentation

SLIDE 1

Economic and fiscal outlook

5 December 2013 Robert Chote Chairman

SLIDE 2

Coverage and process

Five year forecasts, plus assessment of targets
Independent BRC responsible for conclusions
Helped by OBR staff and other officials
Met with the Chancellor on 14 November
Final post-measures forecast on 29 November
No pressure to change any conclusions

SLIDE 3

Overview

The economy

– Growth higher than expected through 2013 – But recent rapid pace unlikely to be sustained – Growth surprise assumed cyclical rather than structural

The public finances

– Deficits revised down by £73 billion from 13-14 to 17-18 – Higher receipts plus (this year) more underspending – Fiscal mandate still met; debt-to-GDP target still missed

The fiscal consolidation

– Government extends spending squeeze to 2018-19 – Brings budget back to balance ex APF transfers – And cuts government consumption to post-war low

SLIDE 4

Recent economic data

Real GDP has grown by 1.8% in first 3 quarters
f 2013, compared to March forecast of 0.5%
Private consumption and housing investment

stronger than expected, but business investment and net trade continue to disappoint

Hours worked even stronger than GDP, relative

to forecast. So productivity disappoints again

Inflation lower than expected

SLIDE 5

The short-term growth outlook

Real GDP momentum continues into Q4
But pace of recovery slows in 2014

– Consumer confidence, credit conditions and housing market more conducive to growth. – But productivity, real incomes and export growth remain weak. Euro area still a concern

SLIDE 6

Real GDP revised higher

% growth p.a. March EFO December EFO Change 2013 0.6 1.4 +0.8 2014 1.8 2.4 +0.6 2015 2.3 2.2 −0.1 2016 2.7 2.6 −0.1 2017 2.8 2.7 −0.1 2018

2.7
By early 2018 real GDP 1.4% higher and

nominal GDP 1% higher than in March EFO (2.7% including data revisions)

SLIDE 7

Level of GDP since the trough

100 104 108 112 116 2010 2011 2012 2013 2014 2015 2016 2017

2010 = 100

OBR March

SLIDE 8

Level of GDP since the trough

100 104 108 112 116 2010 2011 2012 2013 2014 2015 2016 2017

2010 = 100

OBR December OBR March

SLIDE 9

Level of GDP since the trough

100 104 108 112 116 2010 2011 2012 2013 2014 2015 2016 2017

2010 = 100

OBR December Outside average Bank of England

SLIDE 10

Higher GDP cyclical not structural

95 100 105 110 115 120 2012 2013 2014 2015 2016 2017 2018 2019

Actual output in 2012Q4 = 100

Potential output March 2013 Actual output March 2013

SLIDE 11

Higher GDP cyclical not structural

95 100 105 110 115 120 2012 2013 2014 2015 2016 2017 2018 2019

Actual output in 2012Q4 = 100

Potential output March 2013 Actual output March 2013 Potential output December 2013 Actual output December 2013

SLIDE 12

CPI inflation

1 2 3 4 5 1997 2000 2003 2006 2009 2012 2015 2018

Percentage change on a year earlier

March forecast December forecast

SLIDE 13

Pick up in consumer spending this year reflects

lower saving not higher real incomes

So we expect consumer spending growth to

slow until productivity boosts earnings

Consumption wage weak, but product wage

may still be high relative to productivity

Productivity growth only way to deliver rising

living standards in the long term

The household sector

SLIDE 14

House price inflation forecast revised up,

reflecting recent data and mortgage finance

Expect house prices to rise 5% in 2014 and 7%

in 2015. Level in 2017-18 up 10% since March

Prices rising as demand increases, while

supply inelastic. Fundamentals, not a bubble

‘Help to buy’ contributing to higher demand,

raise prices short term and supply later

The housing market

SLIDE 15

Business investment I

60 70 80 90 100 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013

Q1 2008 =100

Latest data Pre-2013 Blue Book data

SLIDE 16

Business investment II

2 4 6 8 10 12 1980 1985 1990 1995 2000 2005 2010 2015

Per cent of GDP

SLIDE 17

Big drop in financial services exports in 2012

revised away

Export growth has been volatile – up 3% in Q2,

down 2½% in Q3

Forecast weaker in medium term than March,
n slightly slower export market growth
Little net trade contribution to growth
Current account deficit narrows slightly

The external sector

SLIDE 18

Euro area economies and banking systems

have yet to fully adjust

Expectation of end to loose global monetary

conditions could be disruptive

Productivity growth could disappoint again,

delaying a return to real income growth

Household finances in deficit and gross debt
rising. Consistent with policy, but potential risks

Risks and uncertainties

SLIDE 19

The public finances

Once again comparisons complicated by:

– Government’s decision to transfer Royal Mail pension fund assets to public sector in 2012-13 – Government’s decision to transfer money from Asset Purchase Facility (APF) to the Treasury now and back again when QE reverses

Focus here on Public Sector Net Borrowing

excluding Royal Mail and APF transfers

Methodological revisions to come

SLIDE 20

Net borrowing down in 2013-14

PSNB ex Royal Mail and APF

March forecast £119.8bn Underlying increase in receipts forecast (mainly VAT, onshore CT and stamp duty) –£5.7bn UK-Swiss tax agreement receipts shortfall +£2.3bn Larger-than-expected underspending by central government departments –£3.5bn (of which –£2bn policy) Underlying decrease in other spending (including local authority underspending) –£1.7bn December forecast £111.2bn

SLIDE 21

Public sector net borrowing

£bn, excluding RM and APF

2013- 14 2014- 15 2015- 16 2016- 17 2017- 18 2018- 19 March

120 108 96 67 43

Receipts forecast
3
10
13
15
15
Depts’ spending
2
1
4
Other spending
1
3
2
2
1
AS measures
2.0

0.1 0.1 0.4 0.6 0.9 December

111 96 79 51 23

2

Memo: change

9
12
17
16
19
Cumulative downward revision of £73bn

from 13-14 to 17-18

SLIDE 22

Autumn Statement decisions

Treasury table shows neutral effect over forecast
£2bn off departmental spending this year, offset by

£1.4bn cumulative tax cut to 18-19 and £0.6bn spending increase in 14-15 and 15-16

This spending increase comprises £5.5bn of specific

increases in departmental spending, mostly offset by £2.2bn of unidentified cuts in other departmental spending and £2.7bn cut in welfare and other AME

But package creates spending pressures beyond

15-16 and tax cuts will accumulate beyond 18-19

SLIDE 23

Total and structural PSNB

2
2

2 4 6 8 10 10 12 12 20 2007- 07-08 20 2009- 09-10 20 2011- 11-12 20 2013- 13-14 20 2015- 15-16 20 2017- 17-18

Per cent of GDP

Struct ctural al Mar March ch PSN PSNB B March

SLIDE 24

Total and structural PSNB

2
2

2 4 6 8 10 10 12 12 20 2007- 07-08 20 2009- 09-10 20 2011- 11-12 20 2013- 13-14 20 2015- 15-16 20 2017- 17-18

Per cent of GDP

Struct ctural al Mar March ch PSN PSNB B March Struct ctural al Dece cember PSN PSNB B Decem ember er

SLIDE 25

The fiscal mandate

CACB as % of GDP 2017-18 2018-19 March +0.8 +0.8 Autumn Statement measures

Implied cut in departmental spending
+1.0

Other forecasting changes (e.g. debt interest)

0.2

December +0.7 +1.6

SLIDE 26

Uncertainty and the mandate

Implies 80% chance of success

6
4
2

2 4 2007-08 2009-10 2011-12 2013-14 2015-16 2017-18

Per cent of GDP

SLIDE 27

Public sector net debt

50 60 70 80 90 2009-10 2011-12 2013-14 2015-16 2017-18

Per cent of GDP

December net debt forecast March net debt forecast

SLIDE 28

Change in net debt on previous year

% of GDP 2015-16 2016-17 March

+2.4 +0.5

Nominal GDP revisions +0.1

Lower net borrowing
0.8
0.6

Other

0.1
0.1

December

+1.7

0.1

SLIDE 29

Receipts and spending

32 35 38 41 44 47 50

Per cent of GDP

SLIDE 30

How PSNB returns to balance

1
14
1
12
1
10
8
8
6
6
4
4
2
2

2

Cum umul ulati tive c change ge, p per c cent o t of GDP

PSCE i E in R RDEL EL PSGI in in CDEL VAT AT Cap apital t tax axes Deb ebt i interes erest So Social s sec ecuri rity Other s her spend ending ng a and rec recei eipts Cha hange i in P PSNB

SLIDE 31

Squeeze on current spending

Government consumption of goods and services as % of GDP

14 14 16 16 18 18 20 20 22 22 24 24 26 26

1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018

Forecast

SLIDE 32

Per cent of GDP 2018-19 vs 2007-08 Change in PSNB

2.7

Change in receipts +0.4 Change in net social benefits +1.7 Change in debt interest +1.7 Change in other spending (mostly public services /investment)

5.7