Written evidence submitted by the CBI
CBI ANALYSIS OF THE OBR NOVEMBER FORECAST
Table 1
CBI AND OBR FORECASTS OF GDP AND BORROWING
| | GDP % change
| Public sector borrowing
|
| | 2010
| 2011 | 2010-11
| 2011-12 |
| | |
| £ billion | % GDP
| £ billion | % GDP
|
| OBR | 29 November | 1.8
| 2.1 | 148.5 | 10.0
| 117.0 | 7.6 |
| CBI | 22 September | 1.6
| 2.0 | 140.6 | 9.5
| 116.2 | 7.6 |
ECONOMIC GROWTH
Growth and employment have both outperformed the OBR's (and other
forecasters') expectations relative to their June forecast. We
are currently compiling our December forecast and consider the
OBR forecast to be reasonable. The OBR believe that around a third
of the upside surprise to GDP growth seen in the last couple of
quarters will persist going forward. The remainder they expect
to be counterbalanced by weaker growth in the near-term.
The OBR sees the recovery proceeding at a relatively sluggish
pace, due to various factors acting as headwinds to growth, such
as the outlook for credit conditions, efforts by the private sector
to reduce indebtedness, and the scale of fiscal consolidation.
We agree with the OBR that there will be some rebalancing in demand,
with business investment and net trade becoming relatively more
prominent as drivers of growth.
The OBR considers two alternative scenarios for the composition
of GDP growth going forward. Under the "delayed rebalancing"
scenario, the outlook for economic growth and the public finances
is somewhat better due to stronger consumption growth.
TREND GROWTH
Trend growth falls back somewhat after 2014 as population growth
slows. The OBR acknowledge that the Spending Review could also
have had an influence on the outlook for trend growth. However,
they judge that the uncertainties surrounding the potential impact
are balanced such that there are limited implications for the
central projection for trend growth. The government's decision
to limit migration is also expected to impact on trend growth,
although decisions are not yet sufficiently final to be built
into the model.
FISCAL OUTLOOK
Borrowing for this year has been revised down slightly by £1
billion relative to the June forecast, mainly due to the strength
of tax receipts. However, receipts weaken in the medium term due
to the OBR revising down their expectations of property prices,
interest rates, oil prices and onshore corporation tax receipts.
The trajectory for spending is also weaker over the forecast horizon
in comparison with June, broadly offsetting the slightly weaker
outlook for receipts and leaving borrowing around £2 billion
lower compared with the June forecast by 2015-16.
Spending
The Spending Review increased total managed expenditure (TME)
by the value of the capital spending increases - around £2
billion a year. Although additional cuts in welfare spending announced
in the Spending Review were recycled back into department budgets,
overall current spending is expected to be weaker going forward
than projected in June. This reflects lower estimated growth in
AME, namely debt interest, public sector pension costs and benefit
expenditure. As a result, TME ends up £6.8 billion lower
by 2014-15 than expected in the Spending Review.
Table 2
PUBLIC SPENDING
| £billion, nominal | 2010-11
| 2011-12 | 2012-13
| 2013-14 | 2014-15
| Cumulative real % change |
| OBR November 2010 | |
| | | |
|
| Total managed expenditure | 698
| 704 | 711 | 719
| 733 | -5.0% |
| Gross investment | 63 | 53
| 50 | 47 | 49 |
-30.1% |
| Current expenditure | 635 |
651 | 661 | 672 |
685 | -2.5% |
| Current DEL1 | 342
| 343 | 344 | 349
| 348 | -8.0% |
| Benefits and tax credits | 193
| 200 | 204 | 203
| 208 | -2.8% |
| Debt interest | 43 | 44
| 49 | 54 | 59 |
24.8% |
| Public sector pensions | 4 |
5 | 5 | 5 | 6
| 24.2% |
| Other AME2 | 53 |
59 | 60 | 62 | 64
| 9.9% |
| Spending Review 2010 | |
| | |
| |
| Total managed expenditure | 697
| 702 | 713 | 724
| 740 | -3.3% |
| Gross investment | 60 | 51
| 49 | 46 | 47 |
-28.7% |
| Current expenditure | 637 |
651 | 665 | 679 |
693 | -1.0% |
| Current DEL1 | 343
| 343 | 344 | 349
| 348 | -7.6% |
| Benefits and tax credits | 193
| 199 | 201 | 201
| 207 | -2.4% |
| Debt interest | 43 | 47
| 52 | 58 | 63 |
32.5% |
| Public sector pensions | 4 |
5 | 6 | 6 | 7
| 62.5% |
| Other AME2 | 54 |
58 | 61 | 65 | 67
| 13.1% |
| June Budget 2010 | |
| | | |
|
| Total managed expenditure | 697
| 700 | 711 | 722
| 738 | -3.6% |
| Gross investment | 60 | 49
| 47 | 43 | 45 |
-31.7% |
| Current expenditure | 637 |
651 | 665 | 679 |
693 | -1.0% |
| Current DEL1 | 343
| 343 | 341 | 341
| 338 | -10.3% |
| Benefits and tax credits | 193
| 199 | 204 | 207
| 214 | 0.9% |
| Debt interest | 43 | 47
| 52 | 58 | 63 |
32.5% |
| Public sector pensions | 4 |
5 | 6 | 7 | 9
| 102.6% |
| Other AME2 | 54 |
57 | 61 | 65 | 69
| 15.9% |
1 Current DEL = Current/resource departmental budgets
2 Other AME (annually managed expenditure) includes
EU contributions and locally financed expenditure.
The inclusion of additional analysis of the AME projections is
a welcome increase in transparency.
INVESTMENT
As a result of revisions to the AME component of public sector
investment, total public sector investment now rises above levels
set out in the March Budget. The largest elements of AME capital
investment are locally financed expenditure and public corporations'
own-financed expenditure. Revisions to these two areas largely
account for the higher level of AME capital investment in the
OBR's November forecast. As a result, net investment only falls
back to 1.3% of GDP rather than 1.1% as originally expected in
the June Budget.
Table 3
PUBLIC SECTOR GROSS INVESTMENT
| £bn | 2010-11
| 2011-12 | 2012-13
| 2013-14 | 2014-15
|
| OBR November 2010 | 62.8 |
52.7 | 49.9 | 47.1
| 48.5 |
| SR 2010 | 59.5 | 50.7
| 48.5 | 45.6 | 47.2
|
| June Budget 2010 | 59.5 |
48.7 | 46.5 | 43.3
| 44.9 |
| March Budget 2010 | 60 | 51
| 48 | 45 | - |
Source: HM Treasury/OBR
Table 4
PUBLIC SECTION NET INVESTMENT
| % GDP | 2010-11
| 2011-12 | 2012-13
| 2013-14 | 2014-15
| 2015-16 |
| Successive govt plans | |
| | |
| |
| Budget 2008 | 2.3 | 2.2
| 2.3 | 2.3 | 2.3
| 2.3 |
| PBR 2008 | 2.7 | 2.1
| 2.0 | 1.9 | 1.8
| 1.7 |
Budget 2009, PBR 2009,
March Budget 2010
| 2.7 | 1.9 | 1.6
| 1.3 | 1.3 | 1.3
|
| June Budget 2010 | 2.6 | 1.8
| 1.5 | 1.2 | 1.1
| 1.1 |
| OBR November 2010 | 2.9 |
2.0 | 1.7 | 1.3 |
1.3 | 1.3 |
Source: HM Treasury/OBR
GOVERNMENT EMPLOYMENT
FORECAST
The OBR is now forecasting a slightly smaller fall in government
employment compared with the June forecast. As a result, government
employment is expected to fall by around 330 thousand rather than
490 thousand, by 2014-15. Of the 160 thousand difference, 130
thousand reflects slightly stronger departmental expenditure as
a result of further welfare cuts being recycled back into department
current budgets in the Spending Review. The remainder reflects
a methodological change.
FISCAL RULES
- Fiscal mandate: achieve cyclically-adjusted current balance
by the end of the rolling, five-year forecast period [currently
2015-16]
- Supplementary target: public sector net debt as a percentage
of GDP to be falling at a fixed date of 2015-16
As a result of the lower borrowing forecasts, the OBR expects
the government to meet its fiscal mandate and supplementary target
with a slightly wider margin of error than expected in June. The
cyclically-adjusted current budget deficit is expected to register
a slightly higher surplus in 2014-15 than projected in June, at
0.5% of GDP compared with 0.4%.
The OBR use the Treasury's equations for estimating cyclically-adjusted
aggregates:
Cyclically-adjusted (structural) current budget surplus = current
budget -0.5*output gap in current fiscal year -0.2*output gap
in previous fiscal year
Cyclically-adjusted (structural) net borrowing = net borrowing
+ 0.5*output gap in current fiscal year + 0.2*output gap in previous
fiscal year
The OBR expects the output gap to close by 2016-17, a year earlier
than projections based on June's published output gap forecast
data would suggest. The OBR have used a different methodology
to estimate the output gap forecast relative to the Treasury's
methodology used for past data. However, they have yet to use
their methodology to estimate the output gap back data. Therefore,
there is an inconsistency in the estimates of the structural deficit
forecasts relative to past data. As the structural deficit is
used to assess the government's performance against its fiscal
mandate, it is important that the OBR publish fully updated output
gap data as soon as possible.
The OBR has taken extra steps to emphasise the uncertainty surrounding
the fiscal forecast. This includes both additional scenario analysis
for the trajectory for economic growth and risk analysis of the
output gap. The publication of additional analysis around the
forecast represents a welcome increase in transparency.
November 2010
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