---

Autumn Forecast

My Lords, with the leave of the House, I should like to repeat a Statement made by my right honourable friend the Chancellor of the Exchequer in another place. The Statement is as follows. ““I would like to make a Statement regarding the Office for Budget Responsibility’s first autumn forecast. I will also inform the House about further measures that the Government are taking to support economic growth, including the new growth review launched today and a far-reaching programme of reforms to our corporate tax system. Following yesterday’s announcement by European Finance Ministers, I would also like to take the first opportunity to update the House about the Irish situation and the UK’s involvement. First, on the OBR’s autumn forecast—copies of which were made available in the Vote Office earlier today—we should take a moment to recognise the significance of this occasion and the practical demonstration of this Government’s commitment to transparency and independent forecasting. Today is the first time that Members of this House will engage in debate about an autumn forecast that has been produced by the independent Office for Budget Responsibility—rather than conjured up by the Chancellor of the Exchequer—and made available to read two hours before the Statement. This is also the first forecast by the new independent chair of the OBR, Robert Chote, with the other members of the Budget Responsibility Committee, Stephen Nickell and Graham Parker, whose appointments were approved by all Treasury Select Committee members from both sides of this House. The country can have full confidence in the independence of these members. The OBR report published today includes some 150 pages of information—an unprecedented level of detail and transparency—much of which is of the kind that was available to previous Governments but never published. I would like to thank the Budget Responsibility Committee and the staff of the OBR for their hard work in putting together this autumn forecast. I hope that we will now entrench this major improvement in the making of fiscal policy by passing the legislation currently before Parliament. While today’s figures are, of course, independent, they are still just forecasts and we must treat them with the degree of caution with which one should treat any forecast. Indeed, the OBR is explicit about that. The report illustrates the uncertainty surrounding any economic forecasts with the use of fan charts rather than claim the infallible certainty that my predecessors asserted when they provided their forecasts. Indeed, the only thing that was infallible and certain was that those political forecasts were wrong. With that caution in mind, let me turn to the forecast. After the deepest recession since the war, the greatest budget deficit in our peacetime history and the biggest banking crisis of our lifetime, recovery was always going to be more challenging than after previous recessions, but the message from the Office for Budget Responsibility is that Britain’s economic recovery is on track. The economy is growing; more jobs are being created; and the deficit is falling. The OBR’s central forecast is for sustainable growth of more than 2 per cent for each of the next five years, with employment rising in each and every year. At a time when markets are gripped by fears about government finances across Europe, today we see that the Government were absolutely right to take the decisive action to take Britain out of the financial danger zone. Britain is on course both to grow the economy and to balance the books—something that some people repeatedly said would not happen. Let me take the House through the detail of the forecast. The forecasts for the economy are broadly in line with those produced for the June Budget, despite the more challenging international conditions. I would also like to point out that they are very similar to the European Commission forecast for the UK, which is also published today. They forecast that Britain will grow faster over the next two years than Germany, France, Japan and the United States of America as well as faster than the average for the eurozone and the EU. The OBR forecasts real GDP growth of 1.8 per cent this year, 2.1 per cent next year, 2.6 per cent in 2012, 2.9 per cent the year after that, 2.8 per cent in 2014 and 2.7 per cent in 2015. Growth this year is now expected to be considerably higher than was forecast in June. In the OBR’s judgment, some of this improvement is likely to be permanent and some of it a temporary impact of stock building. As a result, the OBR forecasts that the rate of growth next year will be 0.2 percentage points below the forecast that the OBR made in June. The OBR also predicts above-trend growth for the four years after that. The level of GDP, or the overall size of our economy, is forecast to be around half a percentage point higher next year than was forecast in June and, indeed, higher throughout the whole forecast period. Some have made predictions of a so-called ““double-dip”” recession. While the OBR points out that, "““growth has been volatile as this is a common characteristic of post recession recoveries””," its central view is that there will be no double-dip recession. Its forecast is for growth next year of more than 2 per cent, and it expects that the slowest quarter of growth, in the first quarter of next year, will be 0.3 per cent, rising back up to 0.7 per cent by the last quarter of next year. The OBR also forecasts that CPI inflation will fall from 3.2 per cent in 2010 to 1.9 per cent in 2012, once the short-term effects of the VAT rise and other temporary factors fall away. Crucially, the OBR forecasts a gradual rebalancing of the economy as we move away from an economy built on debt to an economy where we invest and export—again, something that some people said would not happen. The OBR expects more demand to come from business investment, which is set to grow by more than 8 per cent for each of the next four years, as well as from exports, which are expected to grow on average by more than 6 per cent per year. This new model of sustainable economic growth will rebalance the economy towards investment and exports and away from an unhealthy dependence on private debt and public deficits. We will thus bring to an end the unsustainable situation that saw families save less and less year after year so that they ended up, in the words of the OBR report today, "““effectively borrowing money to purchase increasingly expensive houses””." The OBR has also published today a full forecast for the labour market—something that, I point out, previous Chancellors chose not to publish. Employment is forecast to grow in every year of this Parliament. Total employment is expected to rise from 29.0 million to 30.1 million—that is more than 1 million additional new jobs. On unemployment, thanks to faster than expected growth in the economy, the OBR now expects the rate to be slightly lower this year, at 7.9 per cent instead of 8.1 per cent. Its forecast for the unemployment rate for next year is unchanged from the June Budget, at 8 per cent. For future years, the OBR predicts a gradual decrease in unemployment, with the rate falling every year. By the end of the Parliament, the OBR forecasts that unemployment will fall to just above 6 per cent—that is about half a million fewer unemployed people than at the beginning of this Parliament. The trend in the claimant count is similar to that for the internationally recognised Labour Force Survey measure of unemployment, but the level is expected to be higher. The OBR explains that this revision is mainly due to a change in the way that flows from employment and support allowance on to jobseeker’s allowance as a result of the new work capability assessment are modelled. In other words, more people are assumed to be flowing off ESA and on to JSA. This is a key part of our reforms to create a welfare system that encourages people to seek work and to reduce costs for the taxpayer—in short, we will stop hiding people who can work in the incapacity statistics. Crucially, in each year fewer people are expected to be on both those out-of-work benefits combined than in the June forecast. I can also tell the House that, following the spending review, the OBR has now recalculated its estimate of the reduction in headcount in the public sector. In June, the OBR forecast a reduction in headcount of 490,000 over the next four years. In its latest forecast, the estimate has come down to 330,000, which is a reduction of 160,000. The bulk of the revision results from the action that we have taken to cut welfare bills rather than to cut public services. Our difficult choices on child benefit, housing benefit and other benefits—each of which were opposed by the party opposite—mean fewer posts will be lost across the public sector. Those headcount reductions that still need to take place will happen over four years, not overnight. The OBR also forecasts that private sector job creation will far outweigh the reduction in public sector employment. As the report says, "““A period of rising total employment alongside falling general government employment is in line with employment trends during the 1990s when total employment increased by 1.3 million over six years while general government employment fell by around half a million””." However, the most important point is that the lesson of what is happening all around us in Europe is that, unless we deal decisively with the record budget deficit, many thousands more jobs will be at risk in both the private sector and the public sector. Let me summarise the forecast for the public finances, which shows that Britain is decisively dealing with its debts. Borrowing this year is expected to be £1 billion less than we forecast in June. The OBR forecasts that public sector net borrowing will fall from £148.5 billion this year to just £18 billion in 2015-16. Government debt as a share of GDP is projected to peak just below 70 per cent in 2013-14 and then fall to 67 per cent by 2015-16. The debt ratio is now expected to peak at a lower point compared to June—at just below 70 per cent instead of just above it. On the OBR’s central forecast, we will meet our fiscal mandate to eliminate the structural current budget deficit one year early, in 2014-15. The same is true for our target to get debt falling as a percentage of GDP. Indeed, to use the OBR’s own words, "““The Government has a slightly wider margin for error in meeting the mandate than appeared likely in June””." For the first time, the OBR has also tested the resilience of the fiscal mandate to two alternative scenarios for the economy that critics have put forward. In both cases the mandate is met. It is clear that our decisive actions have proved to the world that Britain can live within her means. This Government have taken Britain out of the financial danger zone and set our economy on the path to recovery. That is the judgment of not only the OBR but the IMF, the OECD, the European Commission, the Bank of England and all the major business organisations in this country. Already our efforts are paying off. Today’s forecast shows that the cost of servicing the Government’s debt has come down. Compared to the June forecast, the OBR predicts that we will save £19 billion in interest payments between now and the end of the forecast period. That is £19 billion that will no longer be paid by British taxpayers to private bondholders and foreign Governments. That is £19 billion that would have been wasted and will be saved instead. This is an uncertain world, but the British recovery is on track. Employment is growing; 1 million more jobs are being created; and the deficit is set to fall. The plan is working, so we will stick to the course. This is the only way to help confidence to flourish and growth to return. I urge those who, when they see what is happening to our neighbours, seriously suggest that I should abandon the decisive plan that we are following and borrow more and spend more, to think again. What they propose would be disastrous for the British economy. It would put us back in the international firing line from which we have worked so hard to escape. It would mean higher deficits and jobs lost. We should reject that path. Stability is a necessary pre-condition for growth, but it is not enough. Our economy’s competitiveness has been in decline for more than a decade and that has undermined its ability to create jobs and grow. That is why we have already announced: four annual reductions in corporation tax; axing the jobs tax; cutting the small companies rate; expanding the loans scheme; simplifying health and safety laws; investing in science and apprenticeships; and promoting exports through trade missions. Let me set out some of the other things that my right honourable friend the Business Secretary and I are announcing today to support growth and a rebalancing of our economy. At the Budget, I set out a plan to reduce the main rate of corporation tax to 24 per cent—its lowest ever rate—to demonstrate our commitment to tax competitiveness. I can now tell the House that the most significant programme of corporate tax reforms for a generation are today being published for consultation with the business community. We propose to make the UK an even more attractive location for international business and investment by reforming our outdated and complex rules for controlled foreign companies. We have seen a steady stream of companies that have left the UK in recent years. This Government, unlike the previous Government, are not content to sit by and watch our competitiveness leach away and our corporate tax base undermined. Another tax issue of crucial importance to our corporate sector is the tax treatment of income from intellectual property. For a long time, we have argued that we should increase the incentives to innovate and to develop new products in this country. To encourage high-tech businesses to invest in the UK and to create high-value jobs here, we can confirm that we will introduce from April 2013 a lower 10 per cent corporate tax rate on profits from newly commercialised patents. We have been consulting with the business community, and I can tell the House that, as a result of that measure, GlaxoSmithKline will today announce: a new £500 million investment programme in the UK to manufacture a newly developed respiratory device at Ware in Hertfordshire; the launch of a new £50 million venture capital fund to invest in healthcare research; the construction of a new facility at the University of Nottingham to develop ““green chemistry”” technology; and the building of Glaxo’s next biopharmaceutical plant in this country, with sites in Northern England and Scotland being considered. In total, GlaxoSmithKline estimates that 1,000 new jobs will be created in the UK over the lifetime of those projects. Today, we also launch a cross-government growth review. This will be a determined, forensic examination of how every part of Government can do more to remove barriers to growth and support new growth opportunities. Too often the natural inclination of Governments is in the opposite direction: creating new regulations; putting up new barriers; and making life more difficult for entrepreneurs and innovators. We are starting to turn the super-tanker around. Together with the Business Department, the Treasury will lead an intensive programme of work that will involve all parts of Government and use evidence provided by the business community and that will report by next year’s Budget. We will identify cross-cutting reform priorities that can benefit the whole economy. Specific priority will be given to: improvements to the planning system and employment law; more support for exporters and inward investors; and reforms to the competition regime. At the same time, we will begin a new sector-by-sector focus on removing barriers to growth and opening up new opportunities. Some of the resulting changes will be substantive on their own; others will in very specific ways help particular industries. Some may be controversial if they confront vested interests. However, brick by brick, we will remove the barriers that are holding Britain back. Finally, Mr Speaker, I would like to update the House on the international assistance package for Ireland. I attended the Europeans meetings in Brussels yesterday. We agreed a three-year package for Ireland worth €85 billion, which, "““is warranted to safeguard financial stability in the euro area and the EU as a whole””." Of that, €35 billion will be used to support Ireland’s banking sector, with €10 billion going towards immediate bank recapitalisation, and €50 billion will be used for sovereign debt support. Ireland will contribute €17.5 billion towards the total package and the remaining €67.5 billion will be split, with one third coming from the IMF, one third from the European financial stability mechanism and one third from bilateral loans and the eurozone facility. The terms of the IMF loan will be determined over the coming weeks. In principle, our bilateral loan is for £3.25 billion and we will expect the loan to be denominated in sterling. The rate of interest on the loan will be similar to the rates levied by the IMF and the eurozone. This loan to Ireland is in Britain’s national interest. It will help one of our closest economic partners manage through these difficult conditions. I should also tell the House that the eurozone Finance Ministers—without me present—discussed a permanent financial stability facility. I have made it clear in the subsequent ECOFIN meeting that the UK will not be part of that. The president of the euro group made it clear that the UK will not be part of the permanent bail-out mechanism and that the European financial stability mechanism, agreed under the previous Government in May and of which we are part, will cease to exist when that permanent eurozone mechanism is put in place. Mr Speaker, when we came into office, Britain was in the financial danger zone. Our economy was unstable, our public finances out of control and our country on the international watch-list to avoid. We took decisive action. Now the independent Office for Budget Responsibility has confirmed that the British recovery is on track, our public finances are under control, a million jobs are set to be created and our economy is rebalancing. Today we take further measures to secure growth and create prosperity. We do so based on the foundation of stability that we have now secured. Britain is on the mend. I commend this Statement to the House.””