Public finances set for "bloodbath" following new OBR figures

11 October 2017 Consultancy.uk

Embattled Chancellor of the Exchequer Philip Hammond is facing what was described as “a bloodbath” in the public finances in his Budget next month. The Office for Budget Responsibility (OBR) is due to declare that it had previously overstated Britain’s economic performance over the past seven years, in an announcement that is predicted to decimate the £26 billion put aside for a smooth Brexit transition.

Last year, the UK Chancellor Philip Hammond budgeted £26 billion in headroom from public finances, as the country prepared for a lengthy Brexit transition. Now, the buffer for the economy could be dented by as much as two-thirds as the government’s fiscal watchdog, the OBR, will conclude that its forecasts for growth have been too optimistic. The news follows the International Monetary Fund’s announcement in July that due to "weaker-than-expected activity" in the first three months of the year, the global financial institution forecasts that the UK economy would grow by 1.7%, compared to a previously anticipated 2%.

The situation is expected to surprise economists, who had been encouraged by Britain’s monthly public finances figures, in spite of revelations made as early as last year – before featuring prominently in the UK’s general election debate in May – that the UK’s national debt had risen by £555 billion since 2010, despite a protracted period of austerity. Wages in real terms have continued to stagnate during the recovery, meanwhile, and with decreased consumer spending power further compounded by the ailing value of Sterling, economic growth has slowed this year. 

Philip HammondBritain’s poor productivity performance over the past decade has meanwhile deepened this year. While the sustained decline was shown by a recent BDO poll-of-polls to have stabilised after April 2017, overall output per hour worked has declined 0.2% in the year to the second quarter of 2017, compared with an OBR forecast for 1.5% growth as recently as the March Budget.

If productivity growth continues to stall, having currently plateaued at best, the economy will only be able to grow if an upturn in pay boosts spending power of consumers, the employment rate rises, or higher immigration boosts the number of employees. Despite national employment having reached a 42 year high, the first two options remain doubtful, as employers across the country increasingly look to automation to cut spending via reductions in wage costs. Meanwhile, immigration figures are falling dramatically, as EU migrants in particular anticipate a hostile post-Brexit environment, and a growing portion of skilled migrants in the country are also weighing up the possibility of leaving.

The coming statement from the OBR also echoes a report from the Management Consulting Association (MCA), earlier in the Autumn. The MCA’s document indicated that the UK consulting industry, which historically is an indicator of the nation’s economic performance as a whole, had seen growth slow dramatically. While EU-based industries including France (11%), Germany (8.3%) and Spain (6%) are all presently expecting increasing levels of growth, the consulting industry of the UK – which the MCA showed had seen expansion in the market fall from 7.8% to 4.8% over the past year – bucks a global trend, suggesting clients are anticipating a period of extended economic turbulence unique to Britain.

Further compounding the government’s tenuous position regarding an uncertain economic future outside the EU, the American Trump administration has joined a group of countries objecting to a proposed deal between the UK and Brussels to divide valuable agricultural import quotas, as US and others attempt to use Britain’s weakened negotiating hand to get a foothold in the country’s sensitive market for farm products. Now, it is widely expected that the OBR’s latest Budget forecast will be considerably downbeat, pouring emphasis on the nation’s lagging productivity rates, leaving Hammond in particular in a precarious political position. Following  recent internal Treasury analysis of the OBR’s figures, the Chancellor will potentially consider a “bloodbath” of major spending cuts in order to re-fill the UK’s depleted Brexit war-chest, having already come under substantial pressure to end the austerity cap on public pay, lower the burden of debt on students and build houses.

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