Speaking in the House of Commons today (13 March), Mr Hammond said he expects the budget deficit to fall to just 2.2 per cent overall as the government borrows for infrastructure and other fixed asset spending.
To put this number into context, the European Union (EU) expects members of the eurozone currency area to have budget deficits of no more than 3 per cent.
Mr Hammond said the Office of Budget Responsibility (OBR) expects the UK economy to grow by 1.5 per cent this year, up from the forecast he gave in November of 1.4 per cent. The OBR expects growth to be 1.3 per cent in both 2019 and 2020.
He said he expects inflation to fall back to the Bank of England’s target level of 2 per cent in 2018. It is currently 3 per cent.
While Mr Hammond eagerly quoted the OBR’s outlook for economic growth, inflation and employment, he failed to mention in his speech the fact that his department declined a request from the OBR for “additional information” on it Brexit policies.
The request for information was revealed in the OBR’s Blue Book, which outlines the independent organisation’s view on the UK economy.
In the Blue Book, the OBR said when it requested more information from the government on how its Brexit policy may impact the UK economy over the period covered by the OBR forecasts, “the government directed us to the Prime Minister’s Florence speech from September”.
On Brexit Mr Hammond said only that he and his colleagues are “preparing for all eventualities”.
The Office for Budget Responsibility said it feels the UK economy is presently operating at above its normal trend level.
When this is the case, the typical response from the Bank of England is to put interest rates up, as it wishes to avoid a situation where demand for goods and services in the economy is rising at a faster pace than the supply, which creates systemic inflation.
The Bank of England have signalled they expect interest rates to rise three times in the next three years.
Speaking at the Treasury Select Committee in parliament last month, Andy Haldane, chief economist of the Bank of England, said the normal rate of economic growth in the UK is now around 1.5 per cent, and he expects this rate to continue.
The OBR's point is the UK is currently growing at beyond that level, with little potential for the level to go up without government or Bank of England policy contributing to it.
UK GDP expanded by 1.7 per cent in 2017, the previous forecast had been 1.5 per cent. Any level of growth above 1.5 per cent is the result either of government action, or a better performance from the global economy helping the UK to grow above its natural rate.
Jim O’Neill, former chief economist of Goldman Sachs and a former Conservative government minister, attributed the better than expected performance of the UK economy since the UK voted to leave the EU to the better performance of the global economy.
Keith Wade, chief economist at Schroders said the upgrade to growth forecast and the deficit outlook were largely in line with what was expected.
But he said the chancellor neglected to mention that the UK economy is the slowest growing in the G7, a point echoed by John McDonnell, the Labour shadow chancellor in his response to the statement.
David.Thorpe@ft.com
