If the economy is a cruise liner then the chancellor made the cabins more affordable for some passengers on Wednesday.Philip Hammond said first-time buyers buying a home of up to £300,000 would pay no stamp duty.While that will make some passengers happy, the weather for their trip could turn stormy in the coming years.That is because the body which assembles economic data is forecasting a dramatic deterioration in conditions.The Office for Budget Responsibility (OBR), which prepares the figures that the chancellor bases his Budget on, predicts that annual economic growth will be below 2% for five years – one of the worst forecasts in living memory.
Why has the situation turned so gloomy? After all, the UK was one of the fastest growing of the major economies in 2016.The answer hinges on productivity. If we return to our cruise ship, for years the crew were able to make it go significantly faster every year. But since the storm that was the financial crisis of 2007, that improved performance has not been repeated.
It’s not clear why productivity has been so disappointing. Experts have several theories, including poor management and a lack of investment.Whatever the reason, the official forecasters have conceded that productivity is unlikely to recover and that translates into slower economic growth. You can see how that outlook has deteriorated in the chart below.
The government’s income is closely linked to growth. The faster the economy grows, the greater the receipts from VAT, income tax, corporation tax and other revenue-raising measures.The government is already borrowing to fund spending on government departments and servicing the nation’s debt. It plans to reduce that borrowing, to zero, but the downgrades to growth means that will be harder to do.The chart below shows how the deficit (the difference between government income and expenditure) is forecast to fall over the next five years, but not as fast as the OBR predicted in the spring.