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1 Economic and fiscal outlook March 2018 Office for BudgetResponsibilityEconomic and fiscal outlook March 2018Cm 9572 CCS0318157642978-1-5286-0244-0 Office for Budget Responsibility :Economic and fiscal outlookPresented to Parliament by the Exchequer Secretary to the Treasury by Command of Her MajestyMarch 2018Cm 9572 Crown copyright 2018 This publication is licensed under the terms of the Open Government Licence except where otherwise stated. To view this licence, visit we have identified any third party copyright information you will need to obtain permission from the copyright holders publication is available at enquiries regarding this publication should be sent to us at 978-1-5286-0244-0 CCS0318157642 03/18 Printed on paper containing 75% recycled fibre content minimumPrinted in the UK by the APS Group on behalf of the Controller of Her Majesty s Stationery Office Contents Foreword .. 1 Chapter 1 Executive summary Overview .. 5 Economic developments since our previous forecast.

2 7 The economic outlook .. 8 The fiscal outlook .. 11 EU financial settlement .. 17 Performance against the Government s fiscal targets .. 19 Chapter 2 Developments since the last forecast Economic developments .. 21 Box : Post-referendum forecast judgements .. 26 Fiscal developments .. 31 Developments in outside forecasts .. 31 Chapter 3 Economic outlook Introduction .. 35 Assumptions regarding the UK s exit from the EU .. 35 The output gap and potential output .. 36 Box : The equilibrium unemployment rate .. 40 Box : Productivity growth: international comparisons .. 43 Key economy forecast assumptions .. 45 Prospects for real GDP growth .. 50 Prospects for inflation .. 55 Prospects for nominal GDP .. 58 Prospects for individual sectors of the economy .. 59 Box : The effect of trade intensity on productivity .. 73 Risks and uncertainties .. 78 Comparison with external forecasters .. 80 Chapter 4 Fiscal outlook Introduction .. 85 Assumptions regarding the UK s exit from the EU.

3 86 Economic determinants of the fiscal forecast .. 87 Policy announcements, risks and classification changes .. 92 Box : The Pension Protection Fund .. 98 Public sector receipts .. 100 Box : Machine games duty and fixed-odds betting terminals .. 121 Public sector expenditure .. 123 Box : Tax credits income growth assumption .. 139 Box : Local authority Budget pressures and reserves .. 149 Loans and other financial transactions .. 160 Box : Forecasting student numbers for our student loans forecast .. 161 Key fiscal aggregates .. 167 Risks and uncertainties .. 180 International comparisons .. 181 Chapter 5 Performance against the Government s fiscal targets Introduction .. 183 The Government s fiscal targets .. 183 The implications of our central forecast .. 184 Recognising uncertainty .. 193 Annex A Policy measures announced since November Overview .. 203 Government policy decisions .. 203 Update on previous measures .. 209 Annex B The EU financial settlement Introduction.

4 215 Estimating the size of the financial settlement .. 216 Impact of the settlement on the public finances .. 226 Index of charts and tables .. 231 Supplementary information and charts and tables data are available on our website. 1 Economic and fiscal outlook Foreword The Office for Budget Responsibility (OBR) was established in 2010 to provide independent and authoritative analysis of the UK s public finances. In this Economic and fiscal outlook (EFO) we set out forecasts to 2022-23. We also assess whether the Government is on course to meet the medium-term fiscal and welfare spending objectives that it has set itself. The forecasts presented in this document represent the collective view of 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. We have, of course, been hugely supported in this by the staff of the OBR. We are enormously grateful for the hard work, expertise and professionalism that they have brought to the task.

5 Given the highly disaggregated nature of the fiscal forecasts we produce, we have also drawn heavily on the work and expertise of officials across government, including in HM Revenue and Customs, the Department for Work and Pensions, HM Treasury, the Ministry of Housing, Communities and Local Government, the Department for Business, Energy and Industrial Strategy, the Department for Education, the Oil and Gas Authority, the Office for National Statistics, the UK Debt Management Office , the Scottish Government and Scottish Fiscal Commission, the Welsh Government, the Department for Communities in Northern Ireland, Transport for London and various public service pension schemes. We are grateful for their time and patience. We have also had useful exchanges with staff at the Bank of England regarding their latest forecasts, for which we are grateful. Given the legal requirement for the OBR to base its forecasts on current Government policy, we once again asked the Government to provide us with any detail on post-Brexit policies in relation to trade, migration and EU finances: On future migration and trade regimes, the Government directed us to the speech made by the Prime Minister in Florence in September 2017.

6 We were also directed to the Prime Minister s speech on 2 March, which was delivered after we closed our forecasts. We did not have advance access to any content from the speech, but would not have changed any of our broad-brush assumptions if we had. As with previous speeches and Government publications, the outcomes will depend on further policy development by the UK authorities and on the continuing negotiations with the EU. On future financial flows and the financial settlement terms described in the joint report published by the UK Government and the European Union on progress during phase one of the Article 50 negotiations, the Government directed us to the Chancellor s letter to the Treasury Select Committee of 24 January 2018 setting out the Treasury s estimate of the total cost of the settlement. We had detailed discussions with Treasury staff and the National Audit Office about the settlement. Our estimate is described in Annex B of this document. Foreword Economic and fiscal outlook 2 In the absence of a meaningful basis to predict the precise outcome of the current negotiations with the EU, our forecasts continue to reflect the provisional broad-brush adjustments that we made in our November 2016 EFO to incorporate the possible impact of Brexit.

7 These are set out in Chapter 3 (economy) and Chapter 4 (fiscal) of this document. We will update these when the Government reaches and publishes a full withdrawal agreement with the EU. Ahead of this EFO, we had an opportunity to view the results of the Government s cross-Whitehall analysis of the economic and fiscal implications of several possible post-Brexit outcomes which at the time had yet to be published. This did not inform changes in our current forecast, but further scrutiny of this analysis and the assumptions and judgements that underpin the results will no doubt be helpful when we come to update our provisional Brexit assumptions for the eventual withdrawal agreement. The remaining forecast process for this EFO has been as follows: In January, the Treasury requested that we finalise the Spring Statement 2018 forecast on a pre-scorecard basis ( before incorporating the effect of any new policy announcements that would be listed in the Treasury s scorecard table of policy decisions if the Spring Statement were to contain such announcements) around two weeks ahead of the Chancellor s statement in order to provide a stable base for any final policy decisions should he deem them necessary.

8 In the event, no new fiscal policy measures have been announced. We began the forecast process with the preparation by OBR staff of a revised economy forecast, drawing on data released since our previous forecast in November and with our preliminary judgements on the outlook for the economy. We sent our first economy forecast to the Chancellor on 18 January. Using the economic determinants from this forecast (such as the components of nominal income and spending, unemployment, inflation and interest rates) we then commissioned new forecasts from the relevant government departments for the various tax and spending streams that in aggregate determine the state of the public finances. We discussed these in detail with the officials producing them, which allowed us to investigate proposed changes in forecasting methodology and to assess the significance of recent tax and spending outturns. In many cases, the BRC requested changes to methodology and/or the interpretation of recent data.

9 We sent our first fiscal forecast (including a provisional judgement on progress towards meeting the fiscal targets) on 31 January. As the forecasting process continued, we identified the key judgements that we would have to make in order to generate our full economy forecast. Where we thought it would be helpful, we commissioned analysis from the relevant analysts in the Treasury to inform our views. The BRC then agreed the key judgements, allowing the production by OBR staff of a second full economy forecast. This provided the basis for a further round of fiscal forecasts. Discussion of these with HMRC, DWP and other departments gave us the opportunity to follow up our requests for further analysis, methodological changes and alternative judgements made during the previous round. We provided our second economy and fiscal forecast to the Chancellor on 15 February. Foreword 3 Economic and fiscal outlook We then produced a third and final economy and fiscal forecast, which allowed us to take on latest data, including initial analysis of January s self-assessment tax receipts, and to ensure that our judgements on the fiscal forecast had been reflected.

10 We completed this final pre-policy-measures forecast and sent it to the Chancellor on 28 February. We met him to discuss these forecasts on the same day. As the Spring Statement did not contain any new policy measures, we did not need to undertake the usual extensive process of scrutinising the costing of tax and spending measures under consideration. We did incorporate the effects of a small number of policy measures announced since November, consistent with the legal requirement that we base our forecasts on current Government policy. These were subject to the same rigorous BRC scrutiny before being incorporated into our forecast as would be the case ahead of Budget . At the Treasury s written request, and as provided for in the Memorandum of Understanding (MoU) between us, we provided the Chancellor and an agreed list of his special advisers and officials with a near-final draft of the EFO on 7 March. This allowed the Treasury to prepare the Chancellor s statement. We provided a full and final copy 24 hours in advance of publication.