Budget boost to UK economy forecast to fade after two years

Official forecasts indicate that the recent UK Budget will provide only a temporary boost to the economy, casting doubt on the government’s promises of sustained growth. The Office for Budget Responsibility (OBR) projects that the economy will experience a growth peak of 2% next year, but this is expected to decline to around 1.5% as the parliamentary term progresses.

The government has staked its reputation on delivering economic growth, asserting that a new approach to investment will lead to improved economic performance and increased household income. However, the OBR warns that, in the short term, the Budget will likely raise inflation and interest rates, which could have an adverse effect on overall economic growth. According to the OBR, the economy’s size will remain “largely unchanged in five years” compared to previous growth forecasts.

In her address, Chancellor Rachel Reeves emphasized that each Budget she presents will focus on the mission to grow the economy. She also pledged to move away from short-term thinking. The current set of policies includes tax increases amounting to £41 billion annually by the end of the parliamentary term, aimed at funding enhanced public services.

Paul Johnson, head of the Institute for Fiscal Studies, noted that the OBR sees a “short-term sugar rush” from the debt-financed spending splurge, which is expected to turn into a modestly negative impact by the end of the parliamentary term. Although the OBR indicates that investment, planning reform, and economic stability should facilitate sustainable growth in the long term, these benefits may not materialize until 2032.

Economic forecasts can be notoriously challenging to make accurately several years in advance, as they are often revised in light of new data. The projections show that the economy is set to grow by nearly 8.2% by 2028, down from the previously forecasted 8.5%. Johnson described this revised growth forecast as “pretty disappointing.”

While the measures outlined in the Budget are likely to increase demand in the immediate term, they may also keep inflation and interest rates elevated, leading to slower growth in subsequent years. The OBR anticipates that inflation will remain slightly above the Bank of England’s target of 2% until 2029.

Economic growth is a critical factor that will influence the government’s financial options throughout the parliamentary term. A robust growth trajectory could lead to higher tax revenues, providing more funds for public services, potential tax reductions, and interest payments on government borrowing. Conversely, weak growth may force the government to scale back its ambitions.

Reeves has stated that while there will be no return to austerity, there will still be “hard decisions to come.” Nevertheless, she expressed confidence that the OBR believes Labour’s plans will positively affect the economy’s “supply capacity,” enhancing its growth potential.

The government’s policy plans are based on the OBR’s forecasts, but economic forecasting remains an inexact science. Predictions can be influenced by a myriad of factors, including geopolitical risks, fluctuations in global energy prices, and economic developments in other large economies. Even minor changes in these variables can significantly impact the trajectory of UK growth.

In her speech, Reeves announced intentions to “catalyse £70 billion of investment” through a new National Wealth Fund, aimed at revamping planning rules to stimulate construction and development across the country. She also pledged to collaborate with devolved governments in Wales, Scotland, and Northern Ireland, as well as regional mayors, to enhance local and regional growth initiatives.

As the UK grapples with economic challenges, the government’s ability to follow through on its growth promises will hinge on both domestic policy effectiveness and external factors that could sway economic conditions. While immediate gains from the Budget may be seen, the long-term outlook remains uncertain, emphasizing the importance of strategic planning and adaptability in the face of evolving economic landscapes.

With the potential for inflation and interest rates to hinder growth, the government will need to navigate carefully to ensure that its strategies yield positive results for the economy and its constituents.