In the Budget, the Chancellor Philip Hammond managed to get away without mentioning Brexit once. Which is funny, because whether or not you believe in Project Fear, there is no doubt that the decision of the UK to leave the EU, particularly the EU single market, is the momentous economic decision of the decade.
Hammond’s speech made much of the fact the Office for Budget Responsibility had revised upwards its economic forecast for 2017. But that is only the case if you compared it to the dark days of autumn, not the optimisim of last spring, when the UK was still firmly embedded in the EU. Although the OBR report forms the basis of the Budget speech, unlike the Tory Chancellor, it has a mandate to tell it straight, without worrying what Brexiteers in the Shires might think.
Here are some of the bits of Brexit bad news buried in the OBR’s Budget report:
1. Economic growth has slowed
Much was made of the fact that UK GDP growth has been revised upwards, from 1.4 per cent to 2 per cent in 2017. But this time last year, when the UK was expected to remain in the EU, the forecast for 2017 was 2.2 per cent.
2. A weaker pound is causing prices to rise
The OBR noted that sterling “remains significantly lower than at the time of the referendum”, and that this is feeding into prices.
This time last year, inflation was expected to be less than 2 per cent until 2018. Now, inflation is expected to rise to 2.4 per cent in 2017, and 2.3 per cent in 2018. As a result, the OBR expects us to buy less in the coming years.
3. And it’s not helping exporters
The flipside of falling sterling is supposed to be that it makes our exports more attractive to consumers abroad.
However, the OBR expects the boost to net trade to be “relatively modest”, based on what happened in the financial crisis, when sterling also weakened. Most damningly, it states: “This boost is not sufficient to offset the prospective weakening in domestic demand.”
4. But house prices are still rising
For the younger generation, one of the more appetising elements of Brexit was the prediction that house prices would fall, and they might finally get a chance to find an affordable home.
Well, the OBR has some news for you. It expects house prices to continue to outstrip average earnings for the rest of the decade.
5. UK trade is likely to fall
The OBR notes that the UK has been trading with other countries more and more intensely since the Second World War, but predicts that this trend will “reverse for a period”. Although, it adds reassuringly, “by far less than was seen in the interwar years”.
6. The Brexit effect will leave the government with less tax revenue
The OBR said pay-as-you-earn income tax (automatically deducted from employees’ salaries) is the government’s “single most important source of revenue”.
However, it has predicted this tax haul could be affected by leaving the EU, because there may be less high earners in sectors such as the financial services, which are deeply connected to the single market.
7. The dependency ratio is about to get worse
The OBR warns that as baby boomers retire, the government must increase its spending in age-related areas such as health, long-term care and the state pension. It states: “Without changes to policy, these pressures would therefore put public sector debt on an unsustainable upward trajectory.”
Why is this relevant to Brexit? Because the government has pledged to reduce immigration – and immigrants tend to be working-age taxpayers who also take on jobs in sectors such as health and social care.
8. Business investment is likely to fall
The OBR expects that however the Brexit negotiations work out, most scenarios are likely to at least temporarily reduce investment.
It expects the fall in business investment to be a gradual slowdown over the next few years.
9. Lower immigration will slow down the economy
The OBR highlights the need to companies to attract skilled workers, in order to compete with other major economies such as Germany.
When it considers the economic slowdown, it explains: “We have calibrated this slowdown on the basis… the UK adopts a tighter migration regime than that currently in place, but not sufficiently tight to reduce net inward migration to the desired ‘tens of thousands’.”
10. Less EU students are coming
Even though EU students are currently treated as “home” students, they contribute to the economy through paying for university accommodation and spending money in student towns.
The OBR has revised down its expectation of students taking up places in English universities (education is a devolved matter). The number of applications in 2017-18 is also lower than it was assumed in November.
It states: “Taken together, these changes reduce our student numbers forecast by 14,000 in 2021-22 relative to November. There is significant uncertainty around our medium-term forecast as the UK exits the EU.”
11. The OBR forecast doesn’t include a “Brexit bill”
It looks increasingly likely that the UK will be expected to settle its debts – in effect be presented with a “Brexit bill” – before it can conclude negotiations of a new trade deal with the EU.
Because the OBR doesn’t know the details of this, however, it has made no allowance for any Brexit-related payments. It’s a bit like spending your holiday money without keeping any back to settle your hotel tab.
12. In fact, the OBR can’t really say much about Brexit at all
Several times in its report, the OBR notes that it asked the government for more information about the Brexit negotiations. However, its team of researchers were only allowed to see information already in the public domain.
The OBR notes:
Parliament requires us to produce our forecasts on the basis of stated Government policy, but not necessarily assuming that particular objectives are achieved. With the negotiations over the UK’s exit from the EU yet even to commence, this is far from straightforward.
In other words, we’re know we’re heading towards the iceberg, but we don’t even know how much of it is there. Happy Budget Day!