Britain’s economy will struggle to grow by more than 1.2% this year as Brexit uncertainty hits business investment and sends house prices into reverse for the first time since the 2008 financial crash, the Office for Budget Responsibility has warned.
The Treasury’s independent forecaster has cut its estimate of economic growth for 2019 from 1.6%, made only last October. It is also predicting a slide in house prices later this year, which will cut stamp duty tax receipts by £3bn. Brexit uncertainty and changes to the way corporation tax is paid, it said, will also knock a £2bn hole in tax payments made by companies.
However, a £50bn increase in income tax receipts and £35bn of extra national insurance contributions over the next five years will keep the public finances on course and cut the annual deficit to £13.5bn or 0.5% of GDP in 2023-24, compared with more than £150bn at its peak. The national debt will decline from 83.3% of GDP in 2018-19 to 73% of GDP, also in 2023-24.
“The outlook for the public finances is somewhat brighter, both this year and over the medium term,” said the OBR chairman, Robert Chote. “This largely reflects the strength of income tax receipts, including self-assessment payments in January, some of which persists over the rest of the forecast.”
Chote also said the government would be paying lower interest charges on its accumulated debt, “thanks to lower RPI inflation in the near term and to lower market interest rates thereafter”.
The combined effect of those factors meant the deficit would be £3bn lower this year and £8bn lower by 2023-24, because the chancellor, Philip Hammond, has chosen to “bank” most of the money and reduce the annual budget deficit rather than spend it, he said.
Laith Khalaf, a senior analyst at the stockbroker Hargreaves Lansdown, said the dip in house prices towards the end of 2019 meant the OBR expects “hardly any growth in house prices this year and next, even assuming we get a smooth Brexit”.
A decline in house prices at the end of this year is expected to drag down annual house price increases to 0.8% this year, and 1.3% next year, the OBR outlook predicts.
Khalaf said: “That trend isn’t a great reflection of the health of the property market or the UK economy, but it will be welcomed by those who are struggling to get on the housing ladder, particularly as real wages are forecast to grow too.”
The OBR expects house price inflation to pick up to 4% in 2020 and stay there for the next four years.
Paul Johnson, the director of the Institute for Fiscal Studies, said the downward revisions in growth this year meant “the medium-term outlook for the economy remains unusually weak”.
Chote said a disorderly no-deal Brexit would probably force the OBR to downgrade its forecasts. Its predictions are based on Theresa May’s deal gaining MPs’ approval, even though it has been voted down twice very heavily.
Some City analysts said the huge level of uncertainty that still exists,just over a fortnight from the end of article 50, meant the OBR’s numbers were based on speculation that was likely to be wrong.
Samuel Tombs, the chief UK economist of Pantheon Macroeconomics, said a Brexit deal would safeguard the OBR’s economic projections but it would still need to change its forecast for government borrowing – because they are based on current interest rates, which would be likely to rise.
Tombs also highlighted the impact of student debt in the autumn budget, when an accounting change means £10.5bn of student loans must be moved onto the Treasury’s books.
The move follows a review by the Office for National Statistics, which has concluded that a large proportion of student loans will never be repaid and should therefore be counted as grant funding in the public accounts.
OBR officials have not included the amount in their estimates while the ONS considers how to treat the £1tn student loan book and how much is likely to be repaid.
The huge increase in income tax and national insurance receipts is forecast to provide the chancellor with £26.6bn of headroom before he hits his self-imposed 2% spending deficit ceiling.
Tombs said the effect of higher interest rates and student loans spending brought on to the government books could cut the chancellor’s headroom to £11bn.
Johnson said that while the outlook for the public finances remained uncertain it was “good news” that Hammond had resisted increases in spending.
“The chancellor has kept his powder dry in terms of potential extra spending in the face of this good fiscal news, waiting for outstanding Brexit uncertainty to dissipate before making his spending review decisions,” he said.
The chancellor also announced:
• A review by the Competition and Markets Authority into the digital advertising market “as soon as possible”.
• £717m for new homes in Cheshire and West London and a commitment to build 22,000 homes along the Oxford-Cambridge Arc, which the government has identified as a corridor ripe for business expansion.
• A £3bn affordable homes guarantee scheme, to build about 30,000 such homes.
• A consultation on planning reform directed at the UK’s ailing high streets, especially to allow for greater change of use between premises.
• £45m to the European Bioinformatics Institute, maintaining Britain’s lead in genomics research.
• £81m investment in a new Extreme Photonics Centre in Oxfordshire to develop new types of lasers.
• Investment of £79m in Archer2, a new supercomputer to be hosted at Edinburgh University that is up to five times faster than the current generation. “Capable of a staggering ten thousand trillion calculations per second,” Hammond said.
• Confirmation of the Low Pay Commission’s remit for the “national living wage” to reach 60% of median earnings by 2020. In addition, Hammond commissioned a review of the wage beyond 2020.