Earlier this week the Treasury made some confident projections about what the economy would look like in 2030 in the event of a vote to leave the EU in June’s referendum. The hazards of forecasting even one month ahead have now been illustrated.
At the time of the budget, the number crunchers at the Office for Budget Responsibility (OBR) said they expected the UK to have to borrow £72.2bn to balance the books in 2015-16. The actual deficit turned out to be £74bn.
To be fair to the OBR, it did say at the time it expected the deficit to be revised down as more data became available. This is a reasonable assumption, given that in the past six financial years the deficit has eventually been reduced by an average of £1.9bn. A repeat of that would leave the OBR’s £72.2bn forecast pretty much spot on.
So let’s give the OBR the benefit of the doubt about 2015-16. What are the prospects of it being right about the deficit coming down to £55.5bn in 2016-17? The economy is clearly slowing, as illustrated by the falls in retail sales in both February and March, and by the small increase in the jobless total.
The effects of the Brexit referendum are hard to assess. Firms are likely to delay investment decisions and consumers may also adopt a wait-and-see approach. But, assuming that the bookies are right and the referendum results in a decision to stay in the EU, there could then be a burst of catchup growth later in the year.
As things stand, it may be tough for the government to meet its borrowing target for 2016-17. The slowdown in the economy, which will be reflected in next week’s growth figures for the first quarter of 2016, is likely to mean lower tax receipts but only with a time lag.
That suggests the coming months will greet the start of speculation about whether or not George Osborne will need to announce fresh spending cuts or tax increases to hit his target of running a budget surplus by 2019-20.
