Government debt levels will not return to levels seen before the financial crisis until 2060 owing to the UK’s weak growth prospects, according to an influential think tank’s analysis of chancellor Philip Hammond’s Autumn Budget.
Poor productivity forecasts unveiled yesterday by the Office for Budget Responsibility (OBR) forced the independent Budget watchdog to revise down their growth predictions, with long-term implications for the public finances.
Paul Johnson, head of the Institute for Fiscal Studies (IFS), said: “The sorts of modest growth rates currently expected imply that […] it would take us until well past the 2060s for debt to fall to its pre-crisis levels of 40 per cent of national income.”
As the economy crashed following the global financial crisis the government was forced to borrow billions to maintain government spending even as tax revenues collapsed. The Conservative government at first pledged to end public sector borrowing, which adds to the debt pile, by 2015, but has been forced to push its deadline back.
Lower growth prospects mean Hammond’s targets to eliminate the government’s deficit in day-to-day borrowing are even further in the distance. Hammond has committed to balancing the books by the middle of the next decade.
“The chances of that look pretty remote to me,” Johnson said.
The public debt forecasts also assume there are no recessions in the next half century – a highly implausible scenario – meaning the actual return to pre-crisis levels may be even longer.
Economists have struggled to work out why productivity has failed to pick up significantly in the decade since the first rumblings of the financial crisis. The OBR forecasts still assume a rise in productivity above the post-crisis trend, at around one per cent a year, but significantly lower than the 1.7 per cent growth previously estimated.
It is “hard to argue that this is unduly pessimistic,” Johnson said.
The downgrade to growth means the UK economy will be £65bn smaller by 2021 than the government thought in March 2016.
That economic weakness will have grim implications for wages, with average earnings still below their 2008 level in 2021, and £1,400 a year lower on average than forecast in early 2016.