Budget 2018 Contents

2The economic outlook and Brexit

Prospects for the economy and households

11.The OBR forecasts that UK real GDP growth will slow to 1.3 per cent in 2018, from 1.7 per cent in 2017, and fluctuate between 1.4 and 1.6 per cent per annum over 2019 to 2023. CPI inflation is expected to return to the Bank of England’s 2.0 per cent target in 2019, while the unemployment rate is expected to fall to 3.7 per cent in 2019 before edging back up to 4.0 per cent over the forecast period. The OBR continues to assume that trend hourly productivity growth will rise gradually to 1.3 per cent in 2023, having made a large downward reassessment of potential productivity growth at its November 2017 forecast.13

Table 1: Overview of the October 2018 OBR economy forecast (brackets denote change since March 2018 forecast)








GDP (% yr/yr)

1.7 (nc)

1.3 (-0.3)

1.6 (0.4)

1.4 (0.1)

1.4 (0.1)

1.5 (nc)


GDP per capita (% yr/yr)

1.1 (nc)

0.6 (-0.3)

1 (0.4)

0.9 (0.1)

0.9 (0.1)

1 (nc)


Output gap (%)

0 (-0.1)

0.2 (-0.1)

0.3 (0.2)

0.2 (0.2)

0.1 (0.1)

0.1 (0.1)


Household consumption (% yr/yr)

1.8 (0.1)

1.3 (0.4)

1.2 (0.4)

1.2 (0.1)

1.3 (-0.1)

1.4 (nc)


Business investment (% yr/yr)

1.8 (-0.5)

0.5 (-1.1)

2.3 (0.3)

2.1 (-0.1)

2.1 (-0.4)

2.1 (-0.4)


Net trade (pp contribution to growth)

0.7 (0.3)

0.2 (-0.2)

-0.1 (-0.4)

-0.1 (-0.1)

0 (nc)

0 (nc)


Inflation, CPI (% yr/yr)

2.7 (nc)

2.6 (0.1)

2 (0.2)

2 (nc)

2.1 (0.1)

2.1 (0.1)


Employment (millions)

32.1 (nc)

32.4 (0.2)

32.7 (0.3)

32.9 (0.4)

33 (0.4)

33.1 (0.4)


Average earnings (% yr/yr)

2.7 (0.1)

2.6 (-0.2)

2.5 (0.1)

2.8 (0.3)

3 (0.2)

3.1 (0.2)


LFS unemployment rate (%)

4.4 (nc)

4 (-0.4)

3.7 (-0.8)

3.8 (-0.8)

3.9 (-0.7)

3.9 (-0.7)


Source: Office for Budget Responsibility, Economic & Fiscal Outlook October 2018, Table 1.1

12.Real household disposable income growth is forecast to be 0.1 per cent in 2018 and zero in 2019, after edging down a little in 2017. Thereafter, the OBR expects it to improve gradually, reaching 1.1 per cent in 2023. Household real consumption growth, meanwhile, is “expected to remain relatively subdued in the near term”, at between 1.2 and 1.5 per cent in each year of the forecast. Since this is greater than income growth through most of the forecast period, the OBR forecasts a further decline in the household saving ratio. In cash terms, it expects the ratio to turn negative by 2020, although it cautions that the level of the saving ratio is often subject to revision.14

Figure 2: OBR forecast of the household saving ratio (per cent of disposable income)


Source: Office for Budget Responsibility, Economic & Fiscal Outlook October 2018, chart 3.21

13.In its 2018 report on Household Finances: income, saving and debt, the Committee recommended that the Treasury should assess the overall state of household finances and the household saving rate:

[…] Treasury Ministers are ultimately responsible for ensuring that low rates of saving or high rates of indebtedness do not imperil long-term economic stability or living standards.

The importance of this responsibility is not reflected in the Autumn Budget report, which contains no discussion of household savings or debt. The Treasury rightly has much to say about the public finances. In the [2018] Budget, the Treasury should report on the state of household finances and the level and rate of household savings, at a regional and national level, including its assessment of the implications for future living standards and wider economic stability. It should identify the most consequential risks to the financial resilience of households and set out its strategy for addressing them.15

14.The Budget report announces some policies designed to support over-indebted households and the provision of affordable credit, including a pilot of a no-interest loans scheme. The Government also published a consultation on the design of the statutory breathing space and debt repayment scheme for people in problem debt.16

15.The Budget includes some policies to support over-indebted households, but the Treasury has once again failed to make an assessment of the overall state of household finances and household savings, and the implications for wider economic stability. This is despite the fact that the OBR forecasts the household cash savings ratio to fall further and into negative territory. It is concerning that the Treasury has no obvious strategy in connection with household finances. The Committee re-iterates its recommendation that the Treasury should report on these issues and set out a clear strategy for addressing them at future Budgets.

Brexit and ‘no deal’

16.The OBR has retained the same broad-brush assumption regarding Brexit since its first post-referendum forecast. In the Economic and Fiscal Outlook, it states that “given the current uncertainty as to how the Government will respond to the choices and trade-offs facing it during the negotiations […] we still have no meaningful basis for predicting the post-Brexit relationship between the UK and EU upon which we could then condition our forecast.”17 It also states that “when concrete agreement on the relationship between the UK and EU is reached, we will adjust our Brexit assumptions as necessary.”18 The OBR has published a discussion paper outlining what this will involve and how it could affect the forecast.19

17.The OBR assumes that the UK and EU negotiate an “orderly transition to a new long-term relationship” and describes a disorderly exit as “among the downside risks confronting the economy, the most immediate and significant”.20 Professor Sir Charles Bean, a member of the OBR’s Budget Responsibility Committee, told the Committee that any forecast the OBR made in the context of what he called a “disorderly no deal” would be highly uncertain:

A key thing there is that you have to start drawing on what information you can get from participants in the economy about how they are preparing for this scenario. [The Bank of England] has its network of regional agents: 8,000 or 9,000 business contacts, the senior decision-makers’ panel of significant decision-makers in business. I am sure the Bank, like us, will want to try to get a quick fix on how businesses are likely to respond.

Having said that there is bound to be a lot of uncertainty. How will households respond? The thing about these sorts of events is that you can get amplifying processes kicking in that you don’t necessarily foresee upfront—this of course happened during the financial crisis—but the way we would go about it is to try to use those additional sources of information as much as we could.21

18.Robert Chote told the Committee that the fiscal impact would depend on whether a disorderly exit would have long-term effects:

The fiscal consequences at large depend an awful lot on whether your short-term problem translates into a permanent loss of potential GDP and potential output relative to your expectations beforehand.

In the case of a disorderly exit, I suspect that this would depend an awful lot on whether you just gummed the whole economy up for six months but then you are back straightforwardly, or whether this is the sort of thing that has longer term lasting effects. Clearly, if it is combined at the same time with a big change in business investment behaviour, and an even greater period of uncertainty, then that could have those sorts of implications.22

19.The Committee has recently reported on the Government’s long-term analysis of the economic impact of the Withdrawal Agreement and other Brexit scenarios, and on the Bank of England’s analysis of short-term orderly and disorderly Brexit scenarios. It concluded that the Government’s White Paper scenario could not be used to inform Parliament’s vote on the Withdrawal Agreement, and that Parliament may wish to draw from the range of scenarios in the Government analysis in order to assess the Agreement’s economic impact.23

The Chancellor’s claim of a ‘deal dividend’

20.At his speech to the 2018 Conservative Party conference, the Chancellor said that there would be a boost to economic growth once a withdrawal deal had been agreed with the EU, which he called a “deal dividend”.24 He reiterated this claim in his Budget speech:

We are at a pivotal moment in our EU negotiations, and the stakes could not be higher. Get it right, and we will not only protect Britain’s jobs, businesses and prosperity, but we will also harvest a double “deal dividend”: a boost from the end of uncertainty, and a boost from releasing some of the fiscal headroom that I am holding in reserve at the moment.25

21.The Chancellor’s claim that there would be a “deal dividend” is examined in the remainder of this chapter. His claim that a second “deal dividend” would arise from the release of fiscal headroom is examined in Chapter 5.

22.In oral evidence to the Committee, Paul Johnson, Director of the Institute for Fiscal Studies, interpreted the Chancellor as referring to an improvement in investor certainty if ‘no deal’ were avoided but was unsure that this could be described as a dividend:

The OBR have constructed their forecast on the assumption of a decent deal. They are not constructed with a probability of no deal built in. That said, there are some forecasters in the City who do take the view that if we get over the hump of this uncertainty, there will be a sigh of relief and some additional investment and therefore a bit more growth in the short run. [ … ] If we avoid disaster, people will breathe a sigh of relief and things will be a little bit better, but that’s absolutely not built into the OBR forecast.26


I think it is odd to refer to a “dividend”. Essentially what I think is being talked about is avoiding something really very bad. If you think of that as a dividend, well, fair enough, but I don’t think normal English would support that.27

23.Rain Newton-Smith, Chief Economist at the Confederation of British Industry (CBI), thought that any such uplift to growth would be limited, since “my sense […] from talking to companies is that they do not have a button that they are ready to press as soon as we have that deal secured [but instead that] once we have that deal secured they at least can breathe a sigh of relief.”28

24.Referring to non-OBR estimates that UK GDP currently may be 1.5 to 2.5 per cent lower than it otherwise would have been if the EU referendum had not taken place,29 Robert Chote told the Committee that

Near term, the idea that you have dodged a particularly disorderly outcome but you are still left uncertain where you are going to be at the endpoint, it would seem unlikely to me that that would deliver a positive surprise that would recover 2 per cent of GDP relative to the path that you would otherwise expect.30

Mr Chote also said that insofar as growth in business investment improved, the public finances could be weakened in the short term owing to increased use of capital allowances.31

25.The Chancellor suggested that the OBR was not able to forecast an improvement in business confidence ahead of a deal being agreed with the EU:

I do not think the OBR would demur from the suggestion that getting a deal agreed with the European Union, which will allow an implementation period and a smooth transition to a future relationship, is likely to have a positive impact on business confidence. [ … ] I hesitate to speak for it, but I am sure the OBR would say that, until it sees exactly what that future deal looks like [ … ] it will not be able to make a full judgment about the impact of it on the UK economy.32

The Chancellor also said that he would be “very happy” to accept a short-term shortfall in fiscal revenues in return for improved business investment.33

26.The OBR already assumes in its forecast that the UK makes an orderly transition to its new economic relationship with the EU. Therefore, no “deal dividend” over and above the existing forecast could be attained simply by avoiding a disorderly outcome. Beyond this, there could be some improvement to business confidence and investment following a an orderly transition or a resolution of Brexit-related uncertainty that is not currently forecast by the OBR. It is not credible that this be described as a dividend.

13 Office for Budget Responsibility, Economic and fiscal outlook October 2018, 29 October 2018, table 1.1 p.13 and table 3.1 p.45

14 Ibid, pp. 54 and 64 to 68

15 Treasury Committee, Household finances: income, saving and debt, Nineteenth Report of Session 2017–19, 18 July 2018

16 HM Treasury, Budget 2018, 29 October 2018, p.80

17 Office for Budget Responsibility, Economic and fiscal outlook October 2018, 29 October 2018, pp. 33–34

18 Ibid, p. 36

19 Office for Budget Responsibility, Brexit and the OBR’s forecasts, Discussion paper No. 3, 10 October 2018

20 Office for Budget Responsibility, Economic and fiscal outlook October 2018, 29 October 2018, p. 12

Published: 12 February 2019