After each Budget, it’s no longer the famed “red book” that I turn to first but the Office for Budget Responsibility’s Economic and Fiscal Outlook. Ever since its creation in 2010, the government’s fiscal watchdog has been highlighting inconvenient truths for ministers.
Only five months before the UK is due to leave the EU, this year’s OBR document is most notable for its warnings over the cost of Brexit. “Notwithstanding potential future revisions, the referendum vote to leave the EU appears to have weakened the economy,” the OBR states on p.8.
It explains: “The fall in the pound has squeezed real household incomes and consumption, while providing only a modest boost to net trade. Meanwhile, uncertainty regarding the Brexit negotiations appears to have dampened business investment (by more than earlier data suggested).
“Studies that construct a pre-vote ‘doppelganger’ for the UK suggest that the economy was 2 to 2½ per cent smaller by mid-2018 than it would have been if the referendum had not been called. The average quarterly growth rate has slowed from 0.6 per cent between 2013 and 2015 to 0.4 per cent since the beginning of 2016, taking the UK from near the top of the G7 growth league table to near the bottom.”
Few economists would disagree with this – but expect Tory Brexiteers to inveigh against the independent OBR, as they did when I interviewed the organisation’s head Robert Chote earlier this year (“In terms of the net effect on GDP, the hits to demand have outweighed the boosts,” he said of the Leave vote).
Though the OBR emphasises that the uncertainty over the UK’s future arrangements means it is not possible to estimate the future cost, it does warn that “we continue to expect virtually no growth in both exports and imports for the last three years of our forecast, partly the result of an assumed reduction in trade intensity after leaving the EU”.
Even before Brexit takes place, economic growth is estimated to fall below 2 per cent in every forecast year (1.6 per cent in 2019, followed by 1.4 per cent in 2020, 1.4 per cent in 2021, 1.5 per cent in 2022 and 1.6 per cent in 2023). As grim as this may appear, Britain will be fortunate if this is the worst it has to face.