The UK economy is set to avoid a recession but people are still expected to face the biggest fall in living standards on record, the UK’s fiscal watchdog warns.
Chancellor Jeremy Hunt has unveiled his new budget for 2023, with major announcements made around pensions, childcare and energy costs. Much of the spending springs from a new windfall, after declining wholesale energy prices and cooling global inflation improved the Treasury’s position compared with the last budget statement in November.
The Office for Budget Responsibility (OBR) - which provides independent, authoritative analysis of the UK's public finances - has forecast in its new report that inflation in the UK will fall from 10.7% in the final quarter of last year, to 2.9% by the end of 2023. It also forecast higher growth than originally anticipated.
“In November, they expected that the UK economy would enter recession in 2022 and contract by 1.4% in 2023. That left many families feeling concerned about the future,” Hunt said.
“But today, the OBR forecast we will not enter a recession at all this year with a contraction of just 0.2%. And after this year the UK economy will grow in every single year of the forecast period: by 1.8% in 2024; 2.5% in 2025; 2.1% in 2026; and 1.9% in 2027.”
OBR chair Richard Hughes said the near-term economic outlook has brightened somewhat, with energy prices and inflation lower than they forecasted back in November. “Both are expected to fall further,” he said.
“This alleviates some of the historic financial squeeze on households and businesses, meaning a shorter and shallower economic downturn over the first half of this year - with GDP falling by just [0.5%], rather than the 2% we expected in November.”
However, the OBR report also found living standards are still expected to fall by the largest amount since records began, although the decline is not as bad as it forecast in November. The OBR said real household disposable income (RHDI) per person was expected to fall by a cumulative 5.7% over the two financial years.
“While this is 1.4 percentage points less than forecast in November, it would still be the largest two-year fall since records began in 1956-57,” the OBR said. “The fall in RHDI per person mainly reflects the rise in the price of energy and other tradable goods of which the UK is a net importer, resulting in inflation being above nominal wage growth.”
This meant that real living standards would still be 0.4% lower than their pre-pandemic levels in 2027- 2028. But they were 0.6% higher than the OBR forecast in November, “thanks to lower market expectations for medium-term gas prices and the upward revision to potential output”.
Mr Hughes also said the speed of the UK economy’s recovery was hampered by a set of “persistent weaknesses” on the supply side. Mr Hughes said those included: “stagnant business investment, the loss of around half a million people from the workforce, and sluggish growth in productivity”.
In today’s budget, the Chancellor spent around two-thirds of the £25 billion a year windfall the brighter economic outlook had afforded him, Mr Hughes said. “He uses some of it to provide more help with energy costs in the near term, offer temporary tax reliefs for businesses, and extend free childcare to parents of younger children.”
Together with a handful of other measures, these would cost around £20 billion a year over the next three years, he said. “These… provide a lasting boost to employment and output.”
Mr Hughes said the Chancellor had managed to do this while meeting government’s target of getting debt falling as a share of GDP over the next five years - but only just. “He does so with only £6.5 billion pounds to spare - the narrowest margin any Chancellor has had against his fiscal rules.”