Forecast evaluation report Robert Chote Chairman

Forecast evaluation report 2017 Robert Chote Chairman

Background to the FER The FER is an annual report looking at the performance of past EFO forecasts against the latest outturn data Rationale Accountability and transparency Lessons for future forecasts We focus this year on economic and fiscal forecasts from 2015: our last forecast under the Coalition 2016: our last forecast before the EU referendum Also an update on our review of fiscal modelling

Outline of remarks The public finances Public sector net borrowing forecasts since 2010 Public sector net borrowing in 2016-17 Public sector net borrowing this year The economy Forecasts for GDP Productivity and the labour market Our Brexit judgements: an update

Public sector net borrowing (PSNB) Per cent of GDP 12 10 8 6 4 Latest data forecast 2 0 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15 15-16 16-17 17-18 18-19 19-20 20-21 21-22

Reasons for forecast differences Statistical changes Changes in Government policy Unexpected economic developments Unexpected fiscal developments

PSNB forecast revisions Per cent of GDP 12 10 8 6 4 2 0-2 Previous forecasts 2017 forecast Latest data

billion PSNB 2-year forecast differences 40 30 20 10 0-10 Higher borrowing/higher spending/lower receipts -20-30 -40 Jun 10 Nov 10 Spending Receipts Net borrowing Lower borrowing/lower spending/higher receipts Mar 11 Nov 11 Mar 12 Dec 12 Mar 13 Dec 13 Mar 14 Dec 14 Mar 15 Jul 15

OBR forecasts vs previous 20 years: PSNB Public sector net borrowing (per cent of outturn GDP) In-year One Two Three Four Five June 2010 0.1-0.6 0.0 1.7 2.9 3.3 November 2010-0.6 0.0 1.6 2.6 3.4 3.3 2011-0.4-0.1 1.0 2.1 2.8 2.8 November 2011-0.6-0.1 0.4 1.0 1.5 1.6 2012-0.6-0.1 0.5 1.2 1.5 1.8 December 2012-0.1-0.3-0.1 0.0 0.0 2013-0.2-0.7-0.6-0.8-0.5 December 2013-0.3 0.1 0.1 0.3 2014-0.1 0.1 0.3 0.6 December 2014-0.1-0.1 0.3 2015-0.1-0.1 0.4 July 2015 0.0 0.2 0.2 November 2015 0.1 0.0 2016 0.1-0.3 November 2016-0.9 2017-0.3

OBR forecasts vs previous 20 years: spending Spending (per cent of outturn GDP) In-year One Two Three Four Five June 2010 0.5 0.0-0.2-0.3-0.2-0.3 November 2010-0.1-0.4-0.3-0.1-0.1-0.8 2011 0.2-0.8-0.9-0.7-0.6-1.3 November 2011-0.3-0.5-0.3-0.3-0.4-0.3 2012 0.0-0.3-0.1-0.1-0.3-0.2 December 2012 0.2-0.1 0.0-0.3-0.1 2013 0.3-0.1 0.1-0.3-0.1 December 2013 0.0 0.1-0.3-0.2 2014 0.2 0.0-0.3 0.0 December 2014 0.1 0.1 0.7 2015 0.1 0.2 1.0 July 2015 0.2 0.3 0.3 November 2015 0.0-0.2 2016 0.1-0.1 November 2016-0.4 2017-0.1

OBR forecasts vs previous 20 years: receipts Receipts (per cent of forecast GDP) In-year One Two Three Four Five June 2010-0.1 0.4 0.1-1.1-1.5-1.8 November 2010 0.6 0.4-0.7-1.0-1.3-1.0 2011 0.4 0.0-0.8-1.2-1.5-1.2 November 2011 0.0-0.7-0.8-1.0-0.8-0.2 2012 0.3-0.5-0.8-1.1-0.7-0.3 December 2012-0.7-1.1-1.3-1.2-0.7 2013-0.8-1.0-1.1-1.0-0.8 December 2013 0.3 0.0-0.1 0.0 2014 0.3 0.1-0.1 0.2 December 2014 0.2 0.4 0.4 2015 0.1 0.6 0.6 July 2015 0.1-0.2-0.2 November 2015 0.2 0.0 2016-0.4-0.5 November 2016 0.5 2017 0.5

PSNB forecasts: uncertainty 10 8 6 PSNB (Per cent of GDP) 4 2 0-2 -4 2012 (adjusted) Latest data 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

billion PSNB in 2016-17 100 90 80 70 60 50 40 30 20 10 0 2016 forecast November 2016 forecast Forecast Outturn: February to 2017 Outturn: October 2016 to January 2017 Outturn: April to September 2016 2017 forecast First estimate of 2016-17 Latest estimate of 2016-17

PSNB in 2016-17: vs today Net borrowing ( billion) 2017 versus latest data 2017 forecast 52.0 Latest outturn 45.0 Difference -7.0 of which: Classification and methodological changes -1.3 Higher income tax and NICs -3.5 Higher VAT receipts -0.9 Higher corporation tax receipts -0.8 Higher other central government receipts -0.9 Lower central government spending -1.9 Higher local authority net borrowing 1.8 Higher public corporation net borrowing 0.5

PSNB to date in 2017-18 2017-18 vs. 2016-17 (percentage change on a year earlier) 2017 forecast against latest 2016-17 data April to August Central government receipts* 2.0 3.7 of which: PAYE income tax and NICs 2.9 4.0 VAT 2.9 3.1 Self-assessment income tax -13.2 5.7 Central government spending* 4.5 4.4 of which: Debt interest 14.6 17.0 EU transfers 28.0 27.6 Central government net investment* 13.3 17.5 Local authority net borrowing* 0.9-2.9 Public corporation net borrowing* 7.3-13.2 *Excludes APF transfers and central government grants to local authorities where relevant

OBR forecast vs previous 20 years: real GDP Real GDP growth In-year One Two Three Four Five June 2010 0.5-0.8-1.3-0.8 0.4-0.4 November 2010-0.1-0.6-1.1-0.8 0.3-0.4 2011-0.2-1.0-0.8 0.2-0.5 November 2011 0.6 0.8 0.0 0.4-0.7-1.2 2012 0.7 0.1 0.4-0.7-1.2 December 2012 1.6 0.9 1.1 0.0-0.9 2013 1.5 1.3 0.0-0.9 December 2013 0.7 0.7 0.1-0.8 2014 0.4 0.0-0.8 December 2014 0.1-0.1-0.4 2015-0.2-0.5 July 2015-0.1-0.5 November 2015-0.1-0.6 2016-0.2 November 2016-0.3

Real GDP 1-year forecast differences 4 3 Percentage points 2 1 0-1 -2-3 -4 June 2010 Average hours Employment Output per hour GDP 2011 2012 2013 2014 2015 2016 2017

Productivity: output per hour 120 115 Output per hour (2009Q1 = 100) 110 105 100 95 90 Successive forecasts June 2010 2017 Outturn

The productivity puzzle: explanations Labour hoarding Inefficient reallocation of capital Very loose monetary policy Loose labour markets Weak business investment

Business investment Per cent 70 60 50 40 30 20 10 0-10 -20-30 1980s 1990s 2008 0 1 2 3 4 5 6 7 8 9 10 Years from peak

US productivity disappointments Dollars per hour (2009 prices) 80 75 70 65 60 55 50 August 2014 January 2015 August 2015 January 2016 August 2016 January 2017 June 2017 45 2000 2004 2008 2012 2016 2020 2024

G7 productivity disappointments 2.0 1.5 November 2014 OECD forecast Outturn Per cent 1.0 0.5 0.0-0.5 Canada France Germany Italy Japan United Kingdom United States

Productivity growth: forecast 8 7 6 Output per hour Average 2017 forecast FSR 2017 projection 5 Per cent 4 3 2 1 0-1 -2 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020 2024 2028 2032 2036

Unemployment rate 9 Per cent 8 7 6 5 June 2010 2013 2014 2015 2016 2017 Latest 4 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Average hours worked Hours per week 34.0 33.5 33.0 32.5 32.0 31.5 June 2010 2012 2013 2014 2015 2016 2017 Latest 31.0 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Our Brexit judgements Weaker pound squeezes consumers Uncertainty deters business investment Weaker pound boosts net exports Transition to less trade-intensive economy Net inward migration to fall

Business investment 130 November 2016 Latest 120 2014Q1 = 100 110 100 90 Q1 2014 Q2 Q3 Q4 Q1 2015 Q2 Q3 Q4 Q1 2016 Q2 Q3 Q4 Q1 2017 Q2

Our Brexit judgements Weaker pound squeezes consumers Uncertainty deters business investment Weaker pound boosts net exports Transition to less trade-intensive economy Net inward migration to fall

Net migration Thousands (year-to-date) 400 350 300 250 200 150 100 50 Latest 2017 forecast 0 2014 2015 2016 2017 2018 2019 2020 2021 2022

Our Brexit judgements Weaker pound squeezes consumers Uncertainty deters business investment Weaker pound boosts net exports Transition to less trade-intensive economy Net inward migration to fall

Conclusion Budget six weeks away Lots of uncertainty in the forecast, but some pointers Bad for public finances Weaker outlook for productivity Good for public finances Lower sustainable unemployment rate More hours worked Downward revisions to last year s deficit Productivity likely to dominate