economic and fiscal outlook november 2011 robert chote chairman
TRANSCRIPT
Economic and fiscal outlookNovember 2011
Robert ChoteChairman
Coverage and process
• Five year forecasts for the economy and public finances, plus assessment of progress against targets
• Independent Budget Responsibility Committee responsible for assumptions, judgements and conclusions
• No political or official pressure to change them
• BRC helped by OBR staff and drawing upon expertise in many Whitehall departments and other bodies
Overview• Growth in 2011 weaker than expected thanks to inflation squeeze
• GDP to grow by 0.9% in 2011 and 0.7% in 2012
• Medium term growth prospects also weaker
• Economy expected to be 3½% smaller by 2016 than thought in March
• Weaker growth means more borrowing – and structural not cyclical
• Without additional action, fiscal targets likely to be missed
• Government announces extra spending cuts in 2015-16 and 2016-17
• Targets back on course to be hit, but with smaller margin than March
How much spare capacity?
-5
-4
-3
-2
-1
0
1
2
3
Q12007
Q3 Q12008
Q3 Q12009
Q3 Q12010
Q3 Q12011
Q3
Per ce
nt
"Aggregate composite" estimates"Principal components analysis" estimates (previous approach)"Principal components analysis" estimates (updated approach)
Output gap c. 2.5% in Q3
Weak growth in potential output
• Output gap smaller in Q3 than at end-2010 and than expected in March
• Would have been much wider if potential output had been growing as strongly as we assumed at Budget time
• Productive potential appears to have grown 1% a year since recession
• Weak productivity growth rather than higher structural unemployment
Output per hour stays below pre-crisis trend
90
95
100
105
110
115
120
125
Q12003
Q12004
Q12005
Q12006
Q12007
Q12008
Q12009
Q12010
Q12011
Inde
x 100 =
Out
put p
er h
our in
2003Q
1
6.6%
Productivity grows less than in past recoveries
94
96
98
100
102
104
106
108
110
112
114
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarters after end of recession
Inde
x 10
0 =
Out
put p
er h
our in
fina
l qua
rter of
th
e re
cess
ion
1980s 1990s 2008-09
Potential output revised down
• Hard to fully explain weak productivity growth
• May be that financial sector problems are preventing firms from reallocating capital to more productive activities
• Now seems sensible to assume gradual rise in potential output growth rather than ‘snap back’ to long run average
• Potential output now expected to be 3½% lower in 2016 than expected in March
Potential output: comparing forecasts
98
100
102
104
106
108
110
112
114
2009 2010 2011 2012 2013 2014 2015 2016
Inde
x 10
0 =
Pot
entia
l out
put i
n 20
09
(Nov
embe
r 20
11 fo
reca
st)
November EFO IMF European Commission OECD
Monthly GDP growth since the Budget
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11
Perc
enta
ge p
oint
s
Production Services Construction Total
Quarterly GDP growth in the short term
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3
Perc
enta
ge c
hang
e on
pre
viou
s qu
arte
r
Annual GDP growth in the medium term
-5
-4
-3
-2
-1
0
1
2
3
4
5
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Perc
enta
ge c
hang
e on
pre
viou
s ye
ar
Level of GDP: forecast comparison
98
100
102
104
106
108
110
112
114
2009 2010 2011 2012 2013 2014
Inde
x 10
0 =
200
9Q2
November EFO March EFOBank of England (Nov) Average independent forecast (Nov)
Net trade contribution to GDP growth
0
1
2
3
4
5
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Perc
enta
ge p
oint
s
November EFO March EFO
Household incomes and consumption
-4
-3
-2
-1
0
1
2
3
4
5
6
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Perc
enta
ge c
hang
e on
pre
viou
s ye
ar
Real consumption Real household disposable income
CPI inflation to fall next year
0
1
2
3
4
5
6
7
8
9
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Perc
enta
ge c
hang
e on
a y
ear
earli
er
Unemployment to rise into next year
0
500
1,000
1,500
2,000
2,500
3,000
3,500
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Thou
sand
s
ILO unemployment Claimant count
Effects of Autumn Statement measures • Spending cuts in 2015-16 and 2016-17
– Cut direct contribution to GDP growth from government consumption
– Assumed offset by looser monetary policy at that horizon
• Credit easing– No effect assumed in this forecast– Potential to boost investment and growth, but hard to judge
effectiveness until we have more details eg of contracts requiring pass-through
• Delayed fuel duty increases– Inflation forecast revised down modestly
• New build indemnity scheme– Modest increase in forecast for housing transactions
Potential risks from the euro area
• Central forecast assumes that euro area ‘struggles through’
• More disorderly outcome a significant downside risk
• Could affect UK through a number of channels– Weaker trade– Tighter credit– Government borrowing costs– Financial system impairment
• Cannot quantify downside risk in a meaningful way, given the range of potential outcomes
Headline deficit to shrink, but more slowly
0
2
4
6
8
10
12
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
Per ce
nt o
f GD
P
November EFO March EFO
Revenues lower and spending higher
• Revenue and spending impact roughly equal in 2015-16
• On the revenue side:– Lower wages and salaries, consumer spending and profits– Lower oil prices, share prices and interest rates – Sharp fall in financial sector corporation tax payments
• On the spending side – Departmental spending is mostly fixed in cash terms– Higher CPI inflation and claimant count unemployment– Offset by lower debt interest costs and spending cuts
Bigger squeeze on public services spending
Annual real change in implied PSCE in RDEL (non-investment spending on public services and admin)
-5
-4
-3
-2
-1
0
1
2
3
4
5
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
Perc
enta
ge c
hang
e on
pre
viou
s ye
ar
Spending Review
Student loans put upward pressure on debt• Average loan per student now estimated at
£7,000, up from £6,800 in March
• Lower earnings forecast reduces expected repayments
• Government pays out more and gets less back during the forecast period, putting modest upward pressure on debt
Debt peak higher than in March
50
55
60
65
70
75
80
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
Per
cent
of G
DP
March EFO November EFO (ex. policy) November EFO (inc. policy)
General government employment
• March forecast suggested 400,000 fall in GGE from 2011Q1 to 2016 Q1
• Bigger implied public services cuts raise estimate to 710,000 by 2017 Q1
• Greater uncertainty thanks to decision to recycle savings from pay restraint in schools and NHS
Policy fiscal risks
• The Government plans to take the Royal Mail’s historic pension deficit into the public sector, but this requires state aid approval.
– Impact would look strongly beneficial in the short term, but would likely be negative in the longer term
• The UK and Switzerland signed an anti tax evasion deal in August, but it has to be ratified by the Swiss parliament and may require a referendum.
– Ministers and HMRC have publicly stated that the agreement should yield £4 to 7 billion.
– We currently judge that the yield from the agreement is likely to be towards the lower end of the range
Meeting the mandate?
-3
-2
-1
0
1
2
3
2014-15 2015-16 2016-17
Per
cent
of G
DP
Autumn Statementmeasures
Budget spendingassumption
Other forecastingchanges
Judgement onpotential output
November EFO
March EFO
Meeting the mandate?
-3
-2
-1
0
1
2
3
2014-15 2015-16 2016-17
Per ce
nt o
f GD
P
Autumn Statementmeasures
Budget spendingassumption
Other forecastingchanges
Judgement onpotential output
November EFO
March EFO
Meeting the mandate?
-3
-2
-1
0
1
2
3
2014-15 2015-16 2016-17
Per
cent
of G
DP
Autumn Statementmeasures
Budget spendingassumption
Other forecastingchanges
Judgement onpotential output
November EFO
March EFO
Meeting the mandate?
-3
-2
-1
0
1
2
3
2014-15 2015-16 2016-17
Per
cent
of G
DP
Autumn Statementmeasures
Budget spendingassumption
Other forecastingchanges
Judgement onpotential output
November EFO
March EFO
Meeting the mandate?
-3
-2
-1
0
1
2
3
2014-15 2015-16 2016-17
Per
cent
of G
DP
Autumn Statementmeasures
Budget spendingassumption
Other forecastingchanges
Judgement onpotential output
November EFO
March EFO
Chances of meeting the mandate
-6
-5
-4
-3
-2
-1
0
1
2
3
4
2006-07 2008-09 2010-11 2012-13 2014-15 2016-17
Per ce
nt o
f GD
P
November central forecast
The supplementary target
• To have debt falling as a share of GDP in 2015-16
• March forecast: fall of 1.4% of GDP
• November forecast: fall of 0.3% of GDP
• Pre-measures forecast: increase of 0.2% of GDP
Sensitivity analysis
• Test how sensitive the public finance forecasts are to four parameters:– Size of the output gap– Pace of the recovery– Interest rates on government debt– Impact of the economic cycle
• Further downward revision to potential GDP the greatest danger
Scenario analysis
• Tests significance of key judgements
• Three scenarios – Persistent tight credit conditions: unhelpful– No structural hit from crisis: helpful– Higher structural unemployment, but growth
unaffected: little net impact
• Disorderly euro outcome hard to quantify