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Economic and fiscal outlook November 2011 Robert Chote Chairman.

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Economic and fiscal outlook November 2011 Robert Chote Chairman
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Page 1: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Economic and fiscal outlookNovember 2011

Robert ChoteChairman

Page 2: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Coverage and process

• Five year forecasts for the economy and public finances, plus assessment of progress against targets

• Independent Budget Responsibility Committee responsible for assumptions, judgements and conclusions

• No political or official pressure to change them

• BRC helped by OBR staff and drawing upon expertise in many Whitehall departments and other bodies

Page 3: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Overview• Growth in 2011 weaker than expected thanks to inflation squeeze

• GDP to grow by 0.9% in 2011 and 0.7% in 2012

• Medium term growth prospects also weaker

• Economy expected to be 3½% smaller by 2016 than thought in March

• Weaker growth means more borrowing – and structural not cyclical

• Without additional action, fiscal targets likely to be missed

• Government announces extra spending cuts in 2015-16 and 2016-17

• Targets back on course to be hit, but with smaller margin than March

Page 4: Economic and fiscal outlook November 2011 Robert Chote Chairman.

How much spare capacity?

-5

-4

-3

-2

-1

0

1

2

3

Q12007

Q3 Q12008

Q3 Q12009

Q3 Q12010

Q3 Q12011

Q3

Per ce

nt

"Aggregate composite" estimates"Principal components analysis" estimates (previous approach)"Principal components analysis" estimates (updated approach)

Output gap c. 2.5% in Q3

Page 5: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Weak growth in potential output

• Output gap smaller in Q3 than at end-2010 and than expected in March

• Would have been much wider if potential output had been growing as strongly as we assumed at Budget time

• Productive potential appears to have grown 1% a year since recession

• Weak productivity growth rather than higher structural unemployment

Page 6: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Output per hour stays below pre-crisis trend

90

95

100

105

110

115

120

125

Q12003

Q12004

Q12005

Q12006

Q12007

Q12008

Q12009

Q12010

Q12011

Inde

x 100 =

Out

put p

er h

our in

2003Q

1

6.6%

Page 7: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Productivity grows less than in past recoveries

94

96

98

100

102

104

106

108

110

112

114

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Quarters after end of recession

Inde

x 10

0 =

Out

put p

er h

our in

fina

l qua

rter of

th

e re

cess

ion

1980s 1990s 2008-09

Page 8: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Potential output revised down

• Hard to fully explain weak productivity growth

• May be that financial sector problems are preventing firms from reallocating capital to more productive activities

• Now seems sensible to assume gradual rise in potential output growth rather than ‘snap back’ to long run average

• Potential output now expected to be 3½% lower in 2016 than expected in March

Page 9: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Potential output: comparing forecasts

98

100

102

104

106

108

110

112

114

2009 2010 2011 2012 2013 2014 2015 2016

Inde

x 10

0 =

Pot

entia

l out

put i

n 20

09

(Nov

embe

r 20

11 fo

reca

st)

November EFO IMF European Commission OECD

Page 10: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Monthly GDP growth since the Budget

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11

Perc

enta

ge p

oint

s

Production Services Construction Total

Page 11: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Quarterly GDP growth in the short term

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3

Perc

enta

ge c

hang

e on

pre

viou

s qu

arte

r

Page 12: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Annual GDP growth in the medium term

-5

-4

-3

-2

-1

0

1

2

3

4

5

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Perc

enta

ge c

hang

e on

pre

viou

s ye

ar

Page 13: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Level of GDP: forecast comparison

98

100

102

104

106

108

110

112

114

2009 2010 2011 2012 2013 2014

Inde

x 10

0 =

200

9Q2

November EFO March EFOBank of England (Nov) Average independent forecast (Nov)

Page 14: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Net trade contribution to GDP growth

0

1

2

3

4

5

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Perc

enta

ge p

oint

s

November EFO March EFO

Page 15: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Household incomes and consumption

-4

-3

-2

-1

0

1

2

3

4

5

6

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Perc

enta

ge c

hang

e on

pre

viou

s ye

ar

Real consumption Real household disposable income

Page 16: Economic and fiscal outlook November 2011 Robert Chote Chairman.

CPI inflation to fall next year

0

1

2

3

4

5

6

7

8

9

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Perc

enta

ge c

hang

e on

a y

ear

earli

er

Page 17: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Unemployment to rise into next year

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Thou

sand

s

ILO unemployment Claimant count

Page 18: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Effects of Autumn Statement measures • Spending cuts in 2015-16 and 2016-17

– Cut direct contribution to GDP growth from government consumption

– Assumed offset by looser monetary policy at that horizon

• Credit easing– No effect assumed in this forecast– Potential to boost investment and growth, but hard to judge

effectiveness until we have more details eg of contracts requiring pass-through

• Delayed fuel duty increases– Inflation forecast revised down modestly

• New build indemnity scheme– Modest increase in forecast for housing transactions

Page 19: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Potential risks from the euro area

• Central forecast assumes that euro area ‘struggles through’

• More disorderly outcome a significant downside risk

• Could affect UK through a number of channels– Weaker trade– Tighter credit– Government borrowing costs– Financial system impairment

• Cannot quantify downside risk in a meaningful way, given the range of potential outcomes

Page 20: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Headline deficit to shrink, but more slowly

0

2

4

6

8

10

12

2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

Per ce

nt o

f GD

P

November EFO March EFO

Page 21: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Revenues lower and spending higher

• Revenue and spending impact roughly equal in 2015-16

• On the revenue side:– Lower wages and salaries, consumer spending and profits– Lower oil prices, share prices and interest rates – Sharp fall in financial sector corporation tax payments

• On the spending side – Departmental spending is mostly fixed in cash terms– Higher CPI inflation and claimant count unemployment– Offset by lower debt interest costs and spending cuts

Page 22: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Bigger squeeze on public services spending

Annual real change in implied PSCE in RDEL (non-investment spending on public services and admin)

-5

-4

-3

-2

-1

0

1

2

3

4

5

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

Perc

enta

ge c

hang

e on

pre

viou

s ye

ar

Spending Review

Page 23: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Student loans put upward pressure on debt• Average loan per student now estimated at

£7,000, up from £6,800 in March

• Lower earnings forecast reduces expected repayments

• Government pays out more and gets less back during the forecast period, putting modest upward pressure on debt

Page 24: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Debt peak higher than in March

50

55

60

65

70

75

80

2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

Per

cent

of G

DP

March EFO November EFO (ex. policy) November EFO (inc. policy)

Page 25: Economic and fiscal outlook November 2011 Robert Chote Chairman.

General government employment

• March forecast suggested 400,000 fall in GGE from 2011Q1 to 2016 Q1

• Bigger implied public services cuts raise estimate to 710,000 by 2017 Q1

• Greater uncertainty thanks to decision to recycle savings from pay restraint in schools and NHS

Page 26: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Policy fiscal risks

• The Government plans to take the Royal Mail’s historic pension deficit into the public sector, but this requires state aid approval.

– Impact would look strongly beneficial in the short term, but would likely be negative in the longer term

• The UK and Switzerland signed an anti tax evasion deal in August, but it has to be ratified by the Swiss parliament and may require a referendum.

– Ministers and HMRC have publicly stated that the agreement should yield £4 to 7 billion.

– We currently judge that the yield from the agreement is likely to be towards the lower end of the range

Page 27: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Meeting the mandate?

-3

-2

-1

0

1

2

3

2014-15 2015-16 2016-17

Per

cent

of G

DP

Autumn Statementmeasures

Budget spendingassumption

Other forecastingchanges

Judgement onpotential output

November EFO

March EFO

Page 28: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Meeting the mandate?

-3

-2

-1

0

1

2

3

2014-15 2015-16 2016-17

Per ce

nt o

f GD

P

Autumn Statementmeasures

Budget spendingassumption

Other forecastingchanges

Judgement onpotential output

November EFO

March EFO

Page 29: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Meeting the mandate?

-3

-2

-1

0

1

2

3

2014-15 2015-16 2016-17

Per

cent

of G

DP

Autumn Statementmeasures

Budget spendingassumption

Other forecastingchanges

Judgement onpotential output

November EFO

March EFO

Page 30: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Meeting the mandate?

-3

-2

-1

0

1

2

3

2014-15 2015-16 2016-17

Per

cent

of G

DP

Autumn Statementmeasures

Budget spendingassumption

Other forecastingchanges

Judgement onpotential output

November EFO

March EFO

Page 31: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Meeting the mandate?

-3

-2

-1

0

1

2

3

2014-15 2015-16 2016-17

Per

cent

of G

DP

Autumn Statementmeasures

Budget spendingassumption

Other forecastingchanges

Judgement onpotential output

November EFO

March EFO

Page 32: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Chances of meeting the mandate

-6

-5

-4

-3

-2

-1

0

1

2

3

4

2006-07 2008-09 2010-11 2012-13 2014-15 2016-17

Per ce

nt o

f GD

P

November central forecast

Page 33: Economic and fiscal outlook November 2011 Robert Chote Chairman.

The supplementary target

• To have debt falling as a share of GDP in 2015-16

• March forecast: fall of 1.4% of GDP

• November forecast: fall of 0.3% of GDP

• Pre-measures forecast: increase of 0.2% of GDP

Page 34: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Sensitivity analysis

• Test how sensitive the public finance forecasts are to four parameters:– Size of the output gap– Pace of the recovery– Interest rates on government debt– Impact of the economic cycle

• Further downward revision to potential GDP the greatest danger

Page 35: Economic and fiscal outlook November 2011 Robert Chote Chairman.

Scenario analysis

• Tests significance of key judgements

• Three scenarios – Persistent tight credit conditions: unhelpful– No structural hit from crisis: helpful– Higher structural unemployment, but growth

unaffected: little net impact

• Disorderly euro outcome hard to quantify


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