The latest GDP forecasts from the OBR made me laugh.
If the Autumn Statement was a court of law, and the OBR was in the dock, it wouldn’t be long until the prosecuting barrister got the OBR to admit that its numbers were an assumption in the short term and a guess thereafter.
The downward revisions in 2017 and 2018 are based on little more than assumption. As I’ve discussed a number of times in this column, the behaviour of broad money supply growth over recent months suggests that, at worst, the UK economy was flat-lining and, more likely, is strengthening not weakening. But the group-think which says Brexit equals weaker growth is alive and kicking in the OBR, hence GDP forecasts (well assumptions) of 1.4 per cent growth in 2017 and 1.7 per cent growth in 2018.
Even though the idea that Brexit means downturn has been thoroughly discredited over recent months, we’re expected to believe it will still happen over the next two years, because of lower trade flows, lower investment and lower net inward migration. The problem with this view is that, when you look at the underlying data used by the OBR, business investment as a proportion of GDP is flat. It’s not collapsing.
The “2 per cent forever” growth forecasts for 2019 onwards are based on a complete blank as to where the economy will be by then. The obvious get-out is to use estimates of underlying potential output growth and hope for the best, which is exactly what the OBR has done.
Forecasts from 2019 onwards are about as clear as a sandstorm. History teaches that the error on the public finance projections is around 1 per cent of GDP per annum i.e. 1 per cent a year from now, 2 per cent after two years etc. In other words, by 2020-21, the public finances could be 5 per cent of GDP higher or lower than projected today, with around half the gap due to GDP error and the other half due to errors in the projections of the public finances.
The real structural problem facing the UK economy is not Brexit, but the size of the state. It’s now 10 years since the global financial crisis struck the economy and yet in 2016-17 we’re likely to have the largest deficit – at 3.5 per cent of GDP – of all the G7 economies, with the exception of Japan. The new chancellor has relaxed the fiscal rules with regard to the structural deficit and public debt and does not appear inclined to push the public spending to GDP ratio sharply lower.
He could have given out a strong signal that Britain is open to the world for business, by announcing a commitment, phased in over the next decade, to reduce the rate of Corporation Tax to 10 per cent. A commitment to 15 per cent five years from now would have been a big step forward as well.
Unfortunately, he’s looking down the wrong end of the telescope. Instead of looking at the opportunity to combine Brexit with vigorous supply-side reform, we’ve had the same old story that Brexit will undermine growth and tax receipts and so there’s no room for manoeuvre.
The good thing in the Autumn Statement was the announcement of improvements to infrastructure investment, but even here there are problems. There are literally thousands of small infrastructure projects which could make a big difference to congestion on our roads, but resources remain skewed towards big ticket infrastructure projects.