In its latest labour market update, the ONS announced that the UK’s employment rate had reached a record high of 73.3%. This latest statistic reflects the strong performance of the labour market generally with youth unemployment, long term unemployment and part-time employment all on downward trajectories. In addition, the British economy in 2014 was the fastest growing in the G7 and further progress has been made on cutting the deficit both in absolute terms and relative to GDP. The ONS release on the public sector finances confirm that progress.
It was within this positive economic background that the Chancellor delivered the final Budget speech of this Parliament last Wednesday. Indeed, in its new Economic and Fiscal Outlook, the OBR has revised its economic forecasts almost entirely in welcome directions. Growth is expected to pick up slightly this year to reach 2.5% and then stay at 2.3% in the following years. The unemployment rate is also expected to fall more than the OBR anticipated at the Autumn Statement. However, the forecast for business investment growth has been revised down in 2015 by 3.3 percentage points; something we argued was likely back in December.
Expectations for borrowing have improved; annual public sector net borrowing is now expected to be a cumulative £6.3 billion lower between 2014/15 and 2018/19 relative to the Autumn Statement forecast. In addition, the national debt as a percentage of GDP is now on the verge of falling; although as the IFS pointed out, this is largely due to increased asset sales. The OBR made small downward revisions on its estimate of the size of the structural deficit. On living standards, lower inflation will help to make subdued nominal income growth more meaningful in real terms. Also, it does seem that average real household incomes (as opposed to earnings) should this year surpass their 2010 levels.