Is a growth downgrade an issue for the budget?

Key Concepts

• Office of Budget Responsibility (OBR): An independent body that provides economic forecasts and assesses public finances in the UK.
• Fiscal Rules: Government-imposed limits on borrowing and spending.
• Doom Loop: A cycle where tight fiscal rules necessitate annual tax rises, which can stifle economic growth, leading to lower tax revenues and further pressure for tax increases.
• Productivity Downgrade: A revision downwards of the OBR's forecast for productivity growth, a key driver of economic expansion.
• Spring Assessment: The OBR's regular forecast update, typically released in the spring.

OBR Forecast and Growth Downgrades

The Office of Budget Responsibility (OBR) is expected to release significant forecast revisions on Wednesday. A key takeaway is that for every year remaining in the current parliament, economic growth is projected to be downgraded compared to the OBR's March assessment. This means that the forecasted growth figures will be lower than previously anticipated.

Government's Rationale for Growth Downgrades

The government is expected to attribute these downgrades to several factors. They will likely argue that:

• Growth in 2025 is slightly higher: Some growth has been pulled forward from the following year into 2025, which lowers the growth figure for the subsequent period.
• Downgrades are not policy-driven: The government will strongly contend that the reduced growth forecasts are not a consequence of their policy decisions or actions in the upcoming budget.
• Productivity Downgrade is the primary cause: The successive downgrades are primarily due to a downward revision in the OBR's productivity forecast, which has been widely anticipated.

Despite these explanations, the reality is that growth will likely be lower after the budget than before, which is presented as a challenge for a government that has prioritized growth.

Rachel Reeves and the "Doom Loop"

The situation poses a significant problem for Rachel Reeves, the Shadow Chancellor. The government came into power with growth as its stated priority and the implication that it possessed the knowledge to foster a higher growth outlook for the UK. However, this has not materialized in a meaningful way.

The Confederation of British Industry (CBI) and other stakeholders are keenly awaiting details on how the government plans to stimulate growth. There have been warnings that a "smorgasbord approach" to taxes could hinder British businesses.

A central issue for Rachel Reeves has been her entanglement in a "doom loop." This refers to a cycle of annual tax rises necessitated by her fiscal rules, which were driven by running spending very close to borrowing limits. In an interview in October, she appeared to acknowledge being in this "doom loop."

Breaking Out of the "Doom Loop"

There are indications from within the government that they are now confident they can announce after Wednesday's budget that they have successfully broken out of this "doom loop." This is reportedly intended to be a surprise element of the budget announcement.

Synthesis and Conclusion

The upcoming OBR forecast is set to reveal a consistent downgrading of UK economic growth projections for the remainder of the parliamentary term. While the government plans to attribute these revisions to external factors, particularly a revised productivity outlook, the outcome presents a stark contrast to their stated priority of economic growth. The situation also highlights the fiscal challenges faced by Rachel Reeves, who has been navigating a cycle of potential tax increases due to her fiscal rules. The government is reportedly aiming to present the budget as a moment where they have successfully exited this "doom loop," a development they intend to reveal as a surprise.