Office for Budget Responsibility

1 Office for Budget Responsibility Economic and fiscal outlook March 2022 CP 648 Office for Budget Responsibility : Economic and fiscal outlook Presented to Parliament by the Exchequer Secretary to the Treasury by Command of Her Majesty March 2022 CP 648 Crown copyright 2022 This publication is licensed under the terms of the Open Government Licence except where otherwise stated. To view this licence, visit nationalarchives. Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned. This publication is available at Any enquiries regarding this publication should be sent to us at ISBN 978-1-5286-3252-2 CCS0222366764 / E02731887 03/22 Printed on paper containing 75% recycled fibre content minimum Produced by the APS Group. Printed in the UK by HH Associates Ltd on behalf of the Controller of Her Majesty s Stationery Office .

2 Contents Foreword .. 1 Chapter 1 Executive summary Overview .. 5 Economic outlook .. 7 Fiscal outlook .. 13 Performance against the Government s fiscal targets .. 18 Chapter 2 Economic outlook Introduction .. 21 Developments since our previous forecast .. 22 Box : The impact of bottlenecks in global product markets .. 23 Key economy forecast assumptions .. 27 Box : How does the Russian invasion of Ukraine affect the UK economy? .. 28 Box : The economic effects of policy measures .. 34 Inflation .. 37 Prospects for real GDP growth .. 41 Labour market .. 47 Box : The impact of the pandemic on labour market participation .. 50 Box : Developments in the outlook for household living standards .. 55 Box : The latest evidence on the impact of Brexit on UK trade .. 62 Nominal GDP forecast .. 66 Sectoral net lending .. 68 Comparison with external forecasters.

3 69 Detailed summary of our central forecast .. 72 Chapter 3 Fiscal outlook Introduction .. 79 Policy announcements .. 81 Classification and other statistical changes .. 84 Public sector receipts .. 86 Box : Why have receipts recovered so strongly in the wake of the pandemic? .. 88 Box : Why is the economy generating such strong income tax revenues? .. 99 Box : What does faster take -up of electric cars mean for tax receipts? .. 114 Public sector expenditure .. 121 Box : Pressures on the NHS and associated public spending risks .. 134 Box : What happened to furloughed employees after the CJRS closed? .. 140 Deficit aggregates .. 149 Balance sheet aggregates .. 155 Box : Why has government cash borrowing fallen so dramatically in 2021-22? .. 168 Risks and uncertainties .. 174 Chapter 4 Performance against the Government s fiscal targets Introduction.

4 177 The fiscal targets .. 177 Recognising uncertainty .. 183 Annex A Policy measures Overview .. 195 Policy announcements .. 196 Scottish Government policy decisions .. 203 Policy costings and uncertainty .. 204 Box : The fiscal impact of student loans reforms .. 206 Update on previous measures .. 210 Policy risks .. 219 Annex B Major balance sheet interventions Introduction .. 221 Financial crisis balance sheet interventions .. 222 Pandemic-related balance sheet interventions .. 223 Annex C Pandemic-related economic scarring Introduction .. 227 Labour supply .. 228 Capital stock .. 230 Total factor productivity .. 231 Summary .. 232 Index of charts and tables .. 233 Supplementary information and charts and tables data are available on our website. Foreword In this Economic and fiscal outlook (EFO) we set out a central forecast to 2026-27 taking account of recent data and Government policies announced up to and including the March 2022 Spring Statement.

5 The forecasts presented in this document represent our collective view as the three independent members of the OBR s Budget Responsibility Committee (BRC). We take full Responsibility for the judgements that underpin them and for the conclusions we have reached. Our remit requires us to present an economic and fiscal forecast that takes account of all factors that influence it. The implications of the Russian invasion of Ukraine for the forecasts in the EFO are reflected primarily through its effect on energy prices and financial markets. But the invasion is first and foremost a human tragedy and a reminder of the terrible costs of wars that bring immense losses for those caught up in them. Our thoughts, and those of OBR staff, are with those affected. As always, we have been greatly supported in our work by the staff of the OBR, who have once again demonstrated their flexibility and resilience in a very challenging and fast-moving environment.

6 We are very grateful for their hard work, expertise and professionalism. We have also drawn heavily on the work and expertise of numerous officials across government in preparing these forecasts, including in HM Treasury, HM Revenue and Customs, the Department for Work and Pensions, the Department for Levelling Up, Housing and Communities, the Department for Education, the Department for Business, Energy & Industrial Strategy, the Ministry of Justice, the Home Office , the Department for Transport, the Department for International Trade, the Oil and Gas Authority, the Office for National Statistics, the UK Debt Management Office , the British Business Bank, the BBC, Homes England, UK Government Investments, the Government Actuary s Department, the Insolvency Service, the Scottish Government, the Scottish Fiscal Commission, the Welsh Government, the Department for Communities and the Department of Finance in Northern Ireland, Transport for London.

7 And various public service pension schemes. We are grateful for their knowledge and patience. We have also held useful discussions with the Bank of England, the Confederation of British Industry, the National Institute of Economic and Social Research, the Institute for Fiscal Studies, the Resolution Foundation, the Institute for Government, the UK Trade Policy Observatory, and the International Monetary Fund. Since our October forecast, the Omicron variant emerged, spread rapidly, and then declined. But with hospital admissions rising again in recent weeks in the UK, and in other parts of the world, it remains too early to consider the pandemic as over. Risks of vaccine-escaping variants and of waning vaccine (or infection-conferred) immunity remain, while the longer-term behavioural legacy of the pandemic will also affect economic and fiscal outcomes for many years. In considering these we have again drawn on the expertise of government scientists, epidemiologists and public health experts, including the Chief Medical Officer, the Scientific Pandemic Influenza Group on Modelling 1 Economic and fiscal outlook Foreword (SPI-M), the UK Health Security Agency, and the Joint Committee on Vaccination and Immunisation.

8 These discussions have been invaluable in helping us to understand the likely future course of the pandemic and to design the vaccine-escaping variant scenario presented in Chapter 4 of this document. As ever, we retain sole Responsibility for all the assumptions in the EFO. The publication date for our forecast was announced on 23 December, well in advance of the required ten weeks notice. For this forecast, the Chancellor again requested additional time between the finalisation of our pre-measures fiscal forecast and the deadline for those policy decisions that would cause movements in our economy forecast. The original timetable anticipated closing the pre-measures economy forecast on 25 February 19 working days prior to publication of the EFO and five more days than the average gap since the OBR was established. This would have required us to finalise market determinants, including gas and oil prices, in the ten working days to 17 February in order to run them through our full suite of economic and fiscal forecasting models.

9 In normal circumstances, we agree with the Treasury that the closure of our pre-measures economy forecast is the final opportunity to incorporate any new data into the forecast, in order to give the Chancellor a stable base on which to take his policy decisions. In the event, the Russian invasion of Ukraine on 24 February and the international response resulted in dramatic movements in key market determinants, especially energy prices, after the planned closure date of our pre-measures economy forecast. We therefore reopened the forecast to capture market movements in the first week of the invasion, and in particular the movements in gas and oil prices. Our economy forecast is therefore based on financial and energy market prices in the five working days to 2 March, which have been incorporated into our full economy and fiscal forecast models. As well as ensuring that our forecast is as up to date as possible, it also ensures that it is consistent with the Government s policy measures that respond to these price movements.

10 As a consequence of this decision, the Chancellor no longer had a stable base against which to take his policy decisions. He therefore requested that we provide some guidance on the implications of post-invasion movements in market determinants for the pre-measures economic and fiscal outlook ahead of it being finalised, in order to inform his policy deliberations. The Treasury assisted us in producing an interim ready-reckoned pre-measures forecast round in the week commencing 7 March, to meet the Chancellor s request in a period when OBR staff were fully deployed on the final forecast round itself. We reviewed, endorsed, and transmitted this updated ready-reckoned pre-measures economic and fiscal forecast to the Chancellor on 8 March 11 working days before publishing the EFO. We have used this ready-reckoned forecast as the basis for the pre-measures fiscal aggregates presented in this EFO. And exceptionally we allowed Treasury officials to observe our final pre-measures economy forecast meetings, as is normally the case for fiscal challenge meetings, to facilitate the rapid flow of information between us and the Treasury in these final stages.