The OBR’s recent forecasts for inflation and economic growth paint a much more pessimistic picture compared to previous projections in March. The OBR now expects inflation to rise to 2.8% by the end of 2024, a significant increase from the earlier forecast of 0.9%. Additionally, the growth forecasts have been downgraded to 0.6% for this year and 0.7% for next year, as opposed to the earlier predictions of 1.8% and 2.5%, respectively.
According to Lindsay James, investment strategist at Quilter Investors, higher interest rates are putting pressure on economic growth, and it will be challenging for the UK to recover from this despite government initiatives to stimulate growth.
Labour’s Shadow Chancellor Rachel Reeves highlighted the impact of existing tax increases, suggesting that these increases will overshadow the recent National Insurance cut.
Chancellor Jeremy Hunt announced a cut in employee National Insurance from 12% to 10%, effective from January 6. He also confirmed the government’s decision to make the “full expensing” business tax break permanent, a measure estimated to cost the Treasury £11 billion annually.
Additional funding was announced to support British manufacturing ventures across various sectors, with a focus on clean energy, the automotive industry, aerospace, and life sciences manufacturing.
The government also pledged a £500 million investment in artificial intelligence, stating that AI will be crucial for future growth. However, despite these measures, the OBR forecasts that the UK economy will grow by only 0.6% this year and 0.7% next year, marking a substantial downgrade compared to previous projections.
Chancellor Hunt also addressed concerns about public sector borrowing, confirming that the government will meet its fiscal rule, which states that public sector borrowing must be below 3% of GDP for almost every year of the forecast period.
In summary, the recent announcements by the government reflect a mixed economic outlook, with various measures aimed at boosting growth and managing fiscal policies. However, challenges remain, especially regarding achieving the desired economic growth targets and addressing the impact of inflation.
