The UK economy is set to grow much quicker than previously thought, according to the government's official forecaster, boosting chancellor Philip Hammond's efforts to cut public sector borrowing.
The Office for Budget Responsibility (OBR) now forecasts growth of two per cent in 2017, chancellor Philip Hammond announced in his Spring Budget statement, while inflation is predicted to rise to only 2.4 per cent.
However, growth is then predicted to slow to 1.6 per cent in 2018, before rising gradually back to two per cent in 2021.
Hammond told Parliament the forecasts left "no room for complacency," but said it would "prepare Britain for a brighter future."
Upgrades to growth and inflation
The OBR, which operates independently despite having a government mandate, previously predicted growth of 1.4 per cent this year, with a squeeze in investment and productivity growth expected.
However, the UK economy has performed better than many economists expected in the time since November’s Autumn Statement, with consumer spending in particular continuing to perform strongly.
The Bank of England had previously dramatically raised its forecasts for UK growth to two per cent this year, although its prediction that inflation will rise to above 2.7 per cent would likely dent consumer spending growth engine.
The OBR's prediction of inflation in 2017 rising to 2.4 per cent in 2017 is significantly lower than both the Bank and the Treasury's consensus expectations of independent economists, which were reported at 2.9 per cent in February.
The economy’s acceleration towards the end of 2016 has given the chancellor more fiscal room – although the OBR noted the chancellor will not at the current rate hits his target of balancing the books during the next Parliament, after 2020.
Public sector net borrowing is now expected to be £16.4bn lower than previously expected at £51.7bn during the 2016/17 tax year – or a deficit of 2.6 per cent of the UK's GDP. This was lower than the OBR’s previous analysis of public finances for January showing borrowing would likely be £12bn lower.
The deficit will fall to 0.7 per cent of GDP in 2021/22, the OBR said, leaving £26bn of headroom.
The chancellor aims to reduce public sector net borrowing to below two per cent of GDP by the end of the current Parliament, after abandoning ex-chancellor George Osborne’s aim to balance the books by the time of the next general election.
Total government borrowing over the course of this tax year was previously predicted to add up to a deficit of £68.2bn, or 3.5 per cent of GDP, before falling to £20.7bn by 2020-21.