The independent budget watchdog has warned UK households are facing high inflation and high interest rates for a year longer than expected.

The Office for Budget Responsibility (OBR) said the UK economy had proved to be more resilient to the shocks of the pandemic and energy crisis than anticipated.

However, in a report accompanying Chancellor Jeremy Hunt’s autumn statement, it said the economy was expected to “grow more slowly” in the years to 2028. 

In addition, inflation was expected to be “more persistent” than previously thought and fuelled by domestic factors such as wage increases, making it harder to bring down. 

The OBR forecast in March that it expected inflation to be back below the Bank of England’s 2% target rate in early 2024, but now expected that to take until mid-2025.

In addition, markets expected interest rates to stay higher for longer to get it under control.

Although higher inflation would boost nominal tax receipts for the Treasury, it also pushed up the cost of welfare benefits, the cost of Government borrowing and people’s mortgage bills.

Living standards, as measured by real household disposable income (RHDI) per person, are also forecast to be 3.5 percentage points lower in 2024/25 than before the pandemic.

The OBR said that although this was “half the peak-to-trough fall” it expected in March, it still represented “the largest reduction in real living standards” since records began in the 1950s.

The Herald:

RHDI per person is not expected to return to its pre-pandemic level until 2027/28.

Mr Hunt cut employee NICs from 12 to 10% across the UK, lowering bills for 27m workers, including 2.4m in Scotland who are expected to benefit by an average of £340.

He also confirmed a slew of tax breaks for business and the self-employed.

However the OBR said while personal and business tax cuts would reduce the tax burden by 0.5%, it will still rise in each of the next five years to a post-war high of 38% of GDP. 

The OBR also revised down its March estimate of medium-term growth in the economy from 1.8 to 1.6% as a result of workers working fewer hours on average. 

Real GDP growth is now forecast to fall from 4.3% in 2022 to 0.6% this year,.0.7% next year and 1.4% in 2025, 1.9% in 2026, 2% in 2027 and 1.7% in 2028. 

Cumulative real growth from 2023 to 27 is 2.4 percentage points down on March’s forecast.

Paul Johnson, director of the Institute for Fiscal Studies, said the outlook for growth was “gloomier” than in March, with the annual average from 2024 to 2027 down from 2.1 to 1.5%.

He said: “The public finances haven’t meaningfully improved. The growth outlook has weakened. Inflation is expected to stay higher for longer. 

“Higher inflation pushes up tax receipts by more than it pushes up spending on debt interest or social security benefits. 

“But rather than use the proceeds to ease the ongoing ‘fiscal drag’ effects of threshold freezes, or to compensate public services for higher costs, the Chancellor opted to cut other taxes – most notably National Insurance and corporation tax. These tax cuts won’t be enough to prevent this from being the biggest tax raising parliament in modern times.” 

“All that being said, if the Chancellor was determined to cut taxes, he has picked a pretty sensible set of taxes to cut. Making full expensing permanent rather than temporary is welcome, though it’s a shame there was no hint of an appetite for more structural reform. 

“Cutting National Insurance is a good way to boost employment. 

“But these tax cuts have been ‘paid for’, in effect, by a bigger squeeze on the real-terms value of public service budgets and an even bigger squeeze on public investment, which is frozen in cash terms. There’s a material risk that those plans prove undeliverable and today’s tax cuts will not prove to be sustainable.”