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UK growth to be upgraded and public sector borrowing reduced

The Office for Budget Responsibility (OBR) is likely to revise its growth forecast for this year from 1.4% to 1.6% or 1.7%, and lower borrowing projections by £3bn, according to a report from the EY ITEM Club.

20 FEB 2017 | CHRIS SEEKINGS
OBR to "paint a marginally better picture of the UK economy" ©Shutterstock
OBR to "paint a marginally better picture of the UK economy" ©Shutterstock

This will be confirmed as the chancellor announces his spring budget early next month, with the expected fall in public sector net borrowing thought to be as a result of stronger than expected tax receipts.

It is also predicted that the OBR are unlikely to make any substantial changes to other forecasts, suggesting that they believe the effects of Brexit on growth are likely to develop outside of its 2021 forecast horizon.

EY ITEM Club, senior economic advisor, Martin Beck, said: “The OBR will paint a marginally better picture of the UK economy and public finances in the short-term, but fiscal policy faces major challenges on both the revenue and spending sides in the longer term.

“However, the continued robustness of the economy and lower-than-expected public sector borrowing mean that there is little pressure on the chancellor to use fiscal levers to support activity or fill any fiscal ‘black hole’.

“One of the most interesting aspects will be how the OBR deals with the latest Brexit developments. We suspect there will be few changes given that lingering questions around the UK’s post-Brexit trade relations with the EU and migration policy are likely to go unanswered for some time yet.”

Although there are not expected to be many substantial policy announcements in the next budget, it is thought that there could be an increase to the tax-free personal allowance, and threshold for the 40% rate of income tax.

In addition, it is believed that the government will want to head off concerns around a ‘cost of living crisis’ due to the weakness of the pound, by providing a temporary cut in fuel duty, and deferring the standard inflation driven increase in Air Passenger Duty for one year.

The chancellor will also will also be under pressure to address the shortfall in health and social care funding, and may relax spending constraints to the NHS budgets set in 2015, possibly tolerating a rise in borrowing.

EY managing partner for tax, Jason Lester, said: “Despite the Chancellor’s assertion that ‘budgets should be boring’ it’s hard to believe that this will be an event completely devoid of policy measures.

“The government will be acutely aware of the need to offset the squeeze on household incomes caused by higher inflation and although we may not get fireworks until the autumn, we should at least be warmed up by a few sparklers.”