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Richard Hughes, chair of the OBR, told the Treasury Committee the projections are linked to inflation forecasts, which rely heavily on a relatively speedy fall in the price of energy.

He said: “Energy shocks of the 70s and 80s lasted much longer than markets are predicting this shock will last.”

Market expectations imply there is a “really substantial fall in energy prices”, especially gas prices, starting early in 2023 and “accelerating really sharply” through 2024 and 2025, David Miles, another member of the OBR, told the committee.

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Forward-looking rates point to a fall of 30-40% in energy prices between the middle of next year and 2024, he said.

Miles added: “That is the single most significant factor in driving down inflation really quite sharply in our [growth] forecasts.”

The UK economy contracted by 0.2% between July and September, as soaring prices hit businesses and households.

According to OBR forecasts released at the same time as the Autumn Statement on 17 November, GDP contracts by 1.4% in 2023 but UK inflation drops sharply over the course of the year and is dragged below zero in the middle of the decade.

The resulting recovery in real incomes, consumption, and investment sees UK GDP return to growth in 2024 and output recover its pre-pandemic level in the fourth quarter, giving growth for that year at 1.3%.

By comparison the Bank of England’s Monetary Policy Committee November meeting had GDP projected to continue to fall throughout 2023 and the first half of 2024, with fourth quarter GDP growth picking up to only around 0.75%.

However while the OBR explained why it was more optimistic on growth, it also told MPs why it was less sanguine about the government expectations there would be a boom in business investment.

OBR chairman Hughes said the government decision to cancel the corporation tax rise, rather than going ahead with it as announced in the Autumn Statement, “would have provided some support to investment”.

But he said the wider economic conditions were just not right for large investment by companies, saying “in the near term given we are forecasting a consumption-driven recession, it is unlikely that you are going to see lots of businesses investing into a recession”.

An economy-wide increase in the cost of capital from the fact interest rates have started to rise also makes it harder for businesses to raise finance to do investment, he said.

“All of that means…business investment stagnates for a few years before it starts to pick up as the economy recovers and interest rates come down a bit,” he told MPs.

Turning to government spending, asked by the committee what the ideal government expenditure plans would look like, Hughes said the UK faced a particular set of expensive problems.

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“We have a tax funded health service, inflation indexed pensions and a lot of debt. A lot of what is driving the size of the state over this forecast and successive forecasts has been those three things.”

He added: “Those things have been getting more expensive because interest rates are higher, inflation is higher and we just have a much higher debt stock than we have been used to.

“We used to have a 30% debt to GDP ratio and now we have 100% debt to GDP and when interest rates triple on that it just hits government spending really quickly.”

There was, he told MPs, little the government could do in the Autumn Statement for those elements of expenditure other than to try to “offset them elsewhere” with tax increases.

OBR Defends Optimistic Growth Rates Telling MPs ‘it Is Not The 70s’ – UK Prime News

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