Contents
Foreword 6
1. Executive summary 10
Overview 10
Economic developments since our previous forecast 13
The economic outlook 13
The fiscal outlook 16
Performance against the Government's fiscal targets 25
2. Developments since the last forecast 28
Introduction 28
Economic developments 28
Data revisions 28
GDP growth since the March 2015 forecast 29
Conditioning assumptions 30
Other forecasts variables 30
Fiscal data developments 31
Developments in outside forecasts 32
Real GDP growth 32
Inflation 33
Public finances 33
3. Economic outlook 34
Introduction 34
Potential output and the output gap 34
The latest estimates of the output gap 35
The growth of potential output 39
Key economy forecast assumptions 42
Monetary policy and credit conditions 42
Fiscal policy and Budget measures 44
World economy 47
World trade 48
Other conditioning assumptions 49
Summary 49
Prospects for real GDP growth 50
The short-term outlook for GDP 50
The medium-term outlook 52
Prospects for inflation 55
CPI inflation 55
RPI inflation 57
The GDP deflator 58
Prospects for nominal GDP growth 59
Prospects for individual sectors of the economy 60
The household sector 60
The corporate sector 68
The government sector 69
The external sector 72
Sectoral net lending 76
Risks and uncertainties 77
Comparison with external forecasters 78
4. Fiscal outlook 84
Introduction 84
Economic determinants of the fiscal forecast 85
Policy announcements, risks and classification changes 89
Direct effect of new policy announcements on the public finances 89
Contingent liabilities and provisions 91
Classification changes 93
Financial sector interventions 93
Public sector receipts 94
Sources of changes in the tax-to-GDP ratio 96
Detailed current receipts forecast 97
Tax-by-tax analysis of changes since March 101
Public sector expenditure 113
Definitions and approach 113
Summary of the expenditure forecast 113
Departmental expenditure limits (DELs) 118
Annuallymanaged expenditure (AME) 126
Loans and other financial transactions 143
Loans and repayments 146
Transactions in other financial assets 148
Accruals adjustments 149
Other factors 150
Central government net cash requirement 151
The key fiscal aggregates 154
Public sector net borrowing 154
Cyclically adjusted net borrowing (the structural fiscal position) 158
Current budget 159
Cyclically adjusted current budget 159
Public sector net debt 159
Risks and uncertainties 161
International comparisons 162
5. Performance against the Government's fiscal targets 164
Introduction 164
The Government's fiscal targets 164
The implications of our central forecast 165
The current fiscal mandate 166
The current and proposed supplementary targets 169
The proposed fiscal mandate 172
The welfare cap 176
Recognising uncertainty 178
Past performance 179
Sensitivity analysis 181
Scenario analysis 184
A. Summer Budget 2015 policy measures 188
Overview 188
Uncertainty 189
Longer-term uncertainties 198
Small measures 199
HMRC operational measures 199
Interactions 201
Welfare package 201
Effect on tax-motivated incorporations 202
Departmental spending 202
Indirect effects on the economy 203
B. The National Living Wage 204
Introduction 204
Estimating the effects on our central economic forecast 204
Policy-related assumptions 204
Estimating the direct effect on the earnings distribution, wage costs and profits 206
Estimating the indirect effects on the economy 207
Uncertainties and sensitivity analysis 210
Implications for our fiscal forecast 212
Next steps 214
Table 1.1. Overview of the economy forecast 15
Table 1.2. Fiscal forecast overview 17
Table 1.3. Changes to public sector net borrowing since March 20
Table 1.4. Changes to public sector net debt since March 21
Table 2.1. Contributions to real GDP growth in the year to 2014Q4 28
Table 2.2. Contributions to nominal GDP growth in the year to 2014Q4 29
Table 2.3. Contributions to real GDP growth in 2015Q1 29
Table 2.4. Contributions to nominal GDP growth in 2015Q1 29
Table 2.5. Contributions to nominal GDP growth from 2014Q1 to 2015Q1 30
Table 2.6. Conditioning assumptions in 2015Q3 30
Table 2.7. March forecast variables and outturns in 2015Q1 31
Table 3.1. Potential output growth forecast 40
Table 3.2. The quarterly GDP profile 52
Table 3.3. Expenditure contributions to growth 54
Table 3.4. Comparison with external forecasts 79
Table 3.5. Comparison with the Bank of England's illustrative projections 80
Table 3.6. Detailed summary of forecast 81
Table 3.7. Detailed summary of changes to the forecast 82
Table 4.1. Determinants of the fiscal forecast 87
Table 4.2. Changes in the determinants of the fiscal forecast 88
Table 4.3. Summary of the effect of Government decisions on the budget balance 90
Table 4.4. Major receipts as a per cent of GDP 95
Table 4.5. Current receipts 98
Table 4.6. Change to current receipts since March 99
Table 4.7. Sources of change to the receipts forecast since March 101
Table 4.8. Key changes to the income tax and NICs forecast since March 104
Table 4.9. Key changes to the VAT forecast since March 105
Table 4.10. Key changes to the onshore corporation tax forecast since March 107
Table 4.11. Key changes to the SDLT forecast since March 108
Table 4.12. TME split between DEL and AME 114
Table 4.13. Total managed expenditure 115
Table 4.14. Changes to total managed expenditure since March 116
Table 4.15. Sources of changes to the spending forecast since March 118
Table 4.16. Changes to DEL in 2014-15 and 2015-16 since March 121
Table 4.17. RDEL and CDEL spending and changes since March 122
Table 4.18. Welfare spending forecast overview 127
Table 4.19. Welfare spending 128
Table 4.20. Key changes to welfare spending since March 129
Table 4.21. Key changes to public service pensions since March 134
Table 4.22. Key changes to expenditure transfers to EU institutions since March 135
Table 4.23. Key changes to locally financed expenditure and public corporations capital expenditure since March 138
Table 4.24. Key changes to central government debt interest since March 140
Table 4.25. Reconciliation of PSNB and PSNCR 145
Table 4.26. Changes in the reconciliation of PSNB and PSNCR 146
Table 4.27. Reconciliation of PSNCR and CGNCR 152
Table 4.28. Changes in the reconciliation of PSNCR and CGNCR 152
Table 4.29. Public sector net borrowing 157
Table 4.30. Changes in public sector net debt since March 160
Table 4.31. Fiscal aggregates 161
Table 4.32. Comparison with European Commission forecasts 162
Table 4.33. Comparison with IMF forecasts 163
Table 5.1. Performance against the Government's fiscal targets 166
Table 5.2. Changes to the cyclically adjusted current budget deficit since March 169
Table 5.3. Changes in the profile of net debt since March 172
Table 5.4. Performance against the welfare cap 177
Table 5.5. Cyclically adjusted current budget deficit in 2018-19 182
Table 5.6. Change in public sector net debt between 2015-16 and 2016-17 182
Table 5.7. Key economic and fiscal aggregates under alternative scenarios 186
Charts
Chart 1.1. The impact of Budget policy decisions over the forecast 11
Chart 1.2. Real GDP growth fan chart 16
Chart 1.3. Public sector net borrowing 18
Chart 1.4. Year-on-year real growth in resource DEL 22
Chart 1.5. Change in real RDEL from 2015-16 23
Chart 1.6. Resource DEL as a share of GDP in successive Parliaments 23
Chart 1.7. Year-on-year changes in cyclically adjusted net borrowing 24
Chart 1.8. Public sector net borrowing fan chart 26
Chart 2.1. Forecasts for real GDP growth in 2015 32
Chart 2.2. Forecasts for CPI inflation in the fourth quarter of 2015 33
Chart 3.1. Range of output gap model estimates 35
Chart 3.2. Clinical indicator-based estimates of the output gap 37
Chart 3.3. Filter-based estimates of the output gap 37
Chart 3.4. Estimates of the output gap in 2015 39
Chart 3.5. Estimates of the output gap in 2016 39
Chart 3.6. Potential output forecasts 41
Chart 3.7. Bank Rate 43
Chart 3.8. Global aond yields 43
Chart 3.9. Sterling effective exchange rate assumption 49
Chart 3.10. Equity prices assumption 49
Chart 3.11. Contributions to monthly output growth 51
Chart 3.12. Contributions to average quartely GDP growth 53
Chart 3.13. The output gap 53
Chart 3.14. Projections of actual and potential output 53
Chart 3.15. Real GDP trowth fan chart 54
Chart 3.16. CPI inflation 57
Chart 3.17. RPI inflation 58
Chart 3.18. GDP deflator 59
Chart 3.19. Real consumption wage and real consumption 61
Chart 3.20. Real household disposable income per capita 62
Chart 3.21. Contributions to real household income growth 63
Chart 3.22. The household saving ratio 64
Chart 3.23. House price inflation forecast 65
Chart 3.24. Residential investment as a share of nominal GDP 67
Chart 3.25. Household gross debt to income 68
Chart 3.26. Business investment as a share of GDP 69
Chart 3.27. Government consumption 70
Chart 3.28. Government consumption of goods and services 71
Chart 3.29. UK export market share 73
Chart 3.30. Contributions to import-weighted domestic demand and imports growth 74
Chart 3.31. Net trade contribution to real GDP 75
Chart 3.32. Current account balance as a share of GDP 76
Chart 3.33. Sectoral net lending 77
Chart 3.34. Comparison of forecasts for the level of GDP 80
Chart 4.1. Impact of policy measures on public sector net borrowing 91
Chart 4.2. Changes in the tax-to-GDP ratio 95
Chart 4.3. Sources of changes in the tax-to-GDP ratio (2014-15 to 2020-21) 97
Chart 4.4. Income tax personal allowance levels in successive forecasts 102
Chart 4.5. Resource DEl spending in cash terms 123
Chart 4.6. Year-on-year real growth in resource DEL 124
Chart 4.7. Chang in real RDEL from 2015-16 125
Chart 4.8. Resouce DEl as a share of GDP in successive Parliaments 125
Chart 4.9. Resource DEl and implied resource DEL relative to GDP 126
Chart 4.10. Illustrative impact on tax credits entitlement 131
Chart 4.11. Generosity of selected benefit and tax credit rates 132
Chart 4.12. Real BBC current expenditure since 2008-09 142
Chart 4.13. Expected proceeds from major asset sales 149
Chart 4.14. Total public sector spending and receipts 158
Chart 4.15. Year-on-year changes in cyclically adjusted net borrowing 159
Chart 5.1. Year-on-year changes to the cyclically adjusted current budget from 2015-16 to 2018-19 168
Chart 5.2. Year-on-year changes to the debt-to GDp ratio 171
Chart 5.3. Sources of deficit reduction from 2015-16 to 2019-20 174
Chart 5.4. Long-term projection of the headline budget balance 175
Chart 5.5. Past episodes of 'normal' and 'non-normal' times 176
Chart 5.6. Cyclically adjusted current budget deficit fan chart 180
Chart 5.7. Public sector net borrowing fan chart 180
Chart 5.8. Receipts fan chart 184
Boxes
Box 3.1. Employment and per capita GDP growth over the past five years 41
Box 3.2. Fiscal multipliers 44
Box 3.3. The economic effects of policy measures 46
Box 4.1. Tax litigation provisions 92
Box 4.2. Fiscal impact of the financial interventions 93
Box 4.3. Revisions to the central government net cash requirement forecast 152
Table A.1. Treasury scorecard of Budget policy decisions and OBR assessment of the uncertainty of costings 190
Table A.2. Example of assigning uncertainty rating criteria: 'Insurance Premium Tax: increase by 3.5pp to 9.5%' 194
Table A.3. HMRC compliance: DEL commitment and DEL elements of related measures 200
Table A.4. The effect of interactions on estimated savings from reducing the benefit cap 201
Table A.5. Scorecard effects on tax-motivated incorporations 202
Table B.1. Estimated effects of the Living Wage Premium on our 2020 economy forecast 210
Table B.2. Sensitivity analyses 212
Table B.3. Effects on net borrowing of introducing the Living Wage Premium 214
Appendix Charts
Chart A.1. OBR assessment of the uncertainty of costings 198
Chart B.1. Illustrative earnings distributions in 2020 befor and after the estimated effects of the Living Wage Premium 207
Chart B.2. Adult minimum wage relative to full-time emdian earnings in 2013 211
Chart B.3. Average annual gains to gaining households in 2020 213