![Page 1: Economic and fiscal outlook November 2011 Robert Chote Chairman](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/1.jpg)
Economic and fiscal outlookNovember 2011
Robert ChoteChairman
![Page 2: Economic and fiscal outlook November 2011 Robert Chote Chairman](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/2.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/3.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/4.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/5.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/6.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/7.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/8.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/9.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/10.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/11.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/12.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/13.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/14.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/15.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/16.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/17.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/18.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/19.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/20.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/21.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/22.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/23.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/24.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/25.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/26.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/27.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/28.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/29.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/30.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/31.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/32.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/33.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/34.jpg)
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](https://reader034.vdocuments.net/reader034/viewer/2022042814/5515e6bb550346d46f8b4f77/html5/thumbnails/35.jpg)
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