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OBR Overestimated UK Productivity For Seven Years And It's Going To Cause Philip Hammond Some Real Problems

Grant Shapps isn't even Theresa May's biggest headache today.

06/10/2017 12:14
Empics Entertainment
Philip Hammond could be about to see his Brexit war chest slashed

Philip Hammond could be in for a rough ride next month, with a suggestion that for the last seven years the UK’s level of productivity has been overestimated, directly impacting on the Budget.

Last year the Chancellor said he was setting aside £26 billion as a fund to help cushion the effects of leaving the European Union:

The OBR expects cyclically adjusted public sector net borrowing to be 0.9% in 2020-2021, giving us £26 billion of headroom against the headline 2% target in our new fiscal rules, maintaining our fiscal resilience over the period. That was then: What Philip Hammond said in his 2017 Spring Budget speech

But that could now be virtually wiped out thanks to inaccurate estimations by the Office for Budget Responsibility (OBR), the Financial Times has reported.

In information that could have been passed to the paper from the Treasury in an attempt to get bad news out early ahead of the Autumn Budget, it was revealed that the chancellor’s Brexit “headroom” could be slashed by as much as two-thirds in a public finance “bloodbath”.

The OBR is due to publish a report on Tuesday in which it will suggest it has repeatedly over-estimated how well the UK is doing productivity-wise, the FT said.

This means that growth forecasts are slower, so there will simply less money for everything, including the NHS, council housing and public sector pay.

Speaking on BBC Radio Four’s Today programme, director of the Institute of Fiscal Studies Paul Johnson explained: “Back in March, the OBR assumed that the economy would be beginning to get back to something like normal over the next three or four years in sense that productivity growth - that’s the amount that we produce every hour we work - would start to get back to normal, growing a couple of percent a year.

“In fact, since last March, the figures have been coming in really badly, productivity has been getting worse not better.”

He added: “It’s certainly going to cause the chancellor a lot more trouble than he was hoping.”

In his Waugh Zone analysis, HuffPost UK’s politics executive editor Paul Waugh explained: “To many this will be evidence of yet another forecasting blunder (the OBR was in Gove’s sights when he attacked ‘experts’ in the EU referendum), but the more immediate problem is a real political headache for Hammond.

“As well as a bit of leeway for Budget goodies to ease the squeeze, he was hoping to have a ‘Brexit cushion’ in case things turned for the worse in coming years.

“Will we now get those tax rises Hammond hinted at this week?”

ADRIAN DENNIS via Getty Images
Philip Hammond is due to give his next budget in November

Also speaking on the Today programme, Rupert Harrison, former chief of staff to George Osborne at the Treasury, said that the overly optimistic estimations meant that reducing the deficit was going to have to wait.

He said: “This ambition of achieving a balanced budget in order to start getting the debt down - which I still think is the right long-term ambition for a small vulnerable open economy like the UK - has been put off a long way to the right.

″[Hammond] has basically said ‘look there are other priorities, there’s too much uncertainty right now to double down on the deficit’ and that is the right thing.”

Hammond is set to deliver his Autumn Budget on 22 November.

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