Sunday 20 November 2016 12:45 pm

UK government borrowing could overshoot forecasts by £7.5bn this year owing to Brexit and reduced tax revenues

UK government borrowing could overshoot forecasts by as much as £7.5bn this year, as reduced tax revenues and the vote to quit the European Union threaten to leave chancellor Philip Hammond with less room for manoeuvre in his first Autumn Statement on Wednesday.

The Office for Budget Responsibility could be in line to slash its forecasts of the United Kingdom’s GDP growth in 2017 by almost a percentage point, to 1.25 per cent in this week’s Autumn Statement, according to analysis by the EY Item Club.

The consensus of independent economic forecasts show markedly lower GDP growth than the OBR's March predictions. The EY Item Club analysis is on the more conservative side of post-referendum downgrades, which show an average forecast of 1.1 per cent for 2017.

The OBR predicted growth in 2017 of 2.2 per cent at the time of former chancellor George Osborne’s March Budget.

Since then the IMF has sharply cut its forecast for the UK to 1.3 per cent growth in 2017, down 0.9 percentage points from its pre-Brexit forecast. The independent Institute for Fiscal Studies has also said that government spending will miss Osborne's 2019-20 surplus target by £25bn.

The OBR is responsible for providing forecasts of the probable effects of government policy on the nation’s finances. However, its job before Wednesday’s Autumn Statement has been made harder by the lack of public clarity over the direction of Brexit negotiations.

The negotiation position – particularly with regard to membership of the EU Single Market and the customs union – could significantly impact UK growth prospects.

Read more: Public borrowing could overrun by £100bn over the next five years

“In the eight months since the Budget the entire fiscal landscape has changed. The OBR faces a challenge in cutting through the post-referendum fog to produce a clear outlook for the UK economy. Given the degree of uncertainty, a cautious approach from the OBR looks likely,” said Martin Beck, senior economic advisor to the EY Item Club.

The reduced forecasts could affect predictions of increased infrastructure spending from chancellor Philip Hammond in an attempt to stimulate the economy.

Writing in the Sunday Telegraph, the chancellor appeared to temper expectations of a spending spree. “We must continue to make progress towards living within our means,” he said.

While the elimination of the government’s deficit remains a target, Hammond has previously talked of a “reset” in economic policy, abandoning Osborne’s rigid timetable of deficit reduction in favour of more fiscal flexibility.