General Debate: the Economy

This Debate Pack has been produced ahead of the general debate on ‘The Economy’, to be held in the Commons Chamber on Thursday 22 March 2018.

The UK economy grew by 1.7% in 2017, slightly slower than in 2016. This relatively modest growth reflected subdued growth in consumer spending. Consumers faced higher inflation, a result of past falls in the pound which raised import prices, and lacklustre earnings growth. A stronger export performance has mitigated this to some extent, supported by the lower value of the pound and a resurgent world economy. Much of the world has seen accelerating economic growth of late, including the US and Eurozone.

Inflation, at 2.7% in February, remains above the Bank of England’s 2% target, but is expected to fall during the year. Nevertheless, the Monetary Policy Committee has signalled that it is likely to raise interest rates, possibly in May, as it believes the economy is growing slightly above its “speed limit” of around 1.5% per year.

In its new March forecasts, the Office for Budget Responsibility (OBR) made only very small changes to its GDP growth forecasts: up from 1.4% to 1.5% in 2018 but leaving 2019 and 2020 forecasts unchanged at 1.3%. The big picture is that the OBR saw no reason to alter its outlook on the UK economy, which is of a sustainable growth rate of 1.5% per year. This was downgraded from 2.0% in its November set of forecasts.

In 2016/17, government borrowed £46 billion to make up the difference between its spending and income raised from taxes and other sources. Since its 2009/10 peak the UK’s borrowing – often referred to as the deficit – has fallen by 70%. Borrowing is now at a similar level to before the 2007-2008 financial crisis. The OBR forecast that borrowing will fall each year to just over billion in 2022/23, which is equivalent to around 1% of GDP.

At 85% of GDP, government debt – largely the stock of borrowing arising from past deficits – remains relatively high by recent standards. Prior to the financial crisis, government debt was around 35% of GDP. The OBR forecast that the debt-to-GDP ratio will fall to just under 78% by 2022/23.