The economy faces a ‘brighter future’ than previously thought – but living standards are set to fall by the largest amount since the 1950s, forecasters warn.
While Britain is now tipped to avoid a recession, damage done to the country’s finances by rising energy prices and the pandemic could take years to reverse, the Office for Budget Responsibility (OBR) said.
The independent body expects GDP to contract by 0.2 per cent in 2023 – a significant improvement on the 1.4 per cent slide it forecast in November.
And inflation will fall from 10.7 per cent in the final quarter of last year to 2.9 per cent by the end of this year, it reported.
It also upped its growth forecast for 2024 from 1.3 per cent to 1.8 per cent.
But tough times lie ahead after that as Britain will continue to suffer ‘significant structural challenges’, it reported.
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House prices will fall an estimated ten per cent by 2025, as rising bills and taxes take a toll on people’s incomes. That is expected to trigger a 20 per cent slump in property transactions, said the OBR.
The tax burden is predicted to hit a post-war high of almost 38 per cent of GDP by 2027/28. And households’ disposable income will fall six per cent over two years.
That is below the seven per cent forecast in November, but represents the largest plunge since records began in 1956-57.
As a result, the body downgraded its forecast for economic growth to 2.5 per cent in 2025. It is then expected to rise 2.1 per cent in 2026, and 1.9 per cent in 2027.
In its Budget analysis, the OBR said that compared to its last forecast, ‘the near-term economic downturn is set to be shorter and shallower; medium term output to be higher; and the budget deficit and public debt to be lower’.
‘But this reverses only part of the costs of the energy crisis, which are being felt on top of larger costs from the pandemic,’ it added. ‘And persistent supply-side challenges still weigh on future growth prospects.’ Against this backdrop, the chancellor has spent two-thirds of the improvement in the fiscal outlook on his Budget measures, providing more support with energy bills and business investment in the near term, the OBR reported. That will lower inflation and raise employment and output in the medium term. But it means debt will drop by only the narrowest of margins in five years’ time, the report concluded.
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