OBR forecasting a ‘jobs rich/pay tight’ outlook for the economy

We’ve just had the Autumn Statement by the Chancellor of the Exchequer and the latest Office for Budget Responsibility (OBR) economic and fiscal forecast:    

As expected, the OBR is more optimistic about prospects for the UK economy in 2013 and 2014 than forecast at the time of the Budget, though it is slightly more pessimistic about the period from 2015 to 2017. While the Chancellor emphasized the OBR’s positive message for this year and next, the OBR is in fact therefore still forecasting a rather subdued outlook for the UK economy for much of the rest of the decade. Moreover, the short-term improvement is driven by higher than expected household consumption, with business investment and net exports weaker than forecast at the Budget. As a result the economy remains on an unbalanced and low productivity growth trajectory.  

Despite this the OBR has become considerably more optimistic about the outlook for both employment and unemployment, which is expected to fall to 7% by the end of 2015. However, this welcome outcome is due to continued weakness in pay growth in the private sector and much slower pay growth in the public sector. The recovery is thus forecast to be ‘jobs rich but pay-tight’. Average earnings are forecast to rise by only 2.6% in 2014, with subsequent improvement still below the rate prevailing prior to the recession, although with CPI inflation forecast to fall back to the target rate of 2% by 2016, the OBR is forecasting an end to the squeeze in real earnings.

Slower than expected public sector pay growth means that the OBR is now forecasting slightly fewer public sector job cuts than at the Budget. But even on the latest forecast, general government employment is forecast to fall by 1.1 million between 2010 and the end of the forecast period and by 720,000 during the current Parliament.

The Chancellor’s announced welfare and employment measures targeted at the young unemployed are welcome but the impact remains uncertain. For example, the cut in employers’ National Insurance contributions for under 21 year olds is likely to involve a considerable deadweight element – reducing the net impact on job creation – and may create a disincentive to hire young people aged between 21 and 24.