Prospects for the UK economy.

Kirby, Simon ; Barrell, Ray ; Whitworth, Rachel 等

The production of this forecast is supported by the Institute's Corporate Members: Bank of England, HM Treasury, the Office for National Statistics, Santander (UK) plc and by the members of the NiGEM users group.

Introduction

The performance of the UK economy has deteriorated markedly since autumn 2010. The volatility of output due to the adverse weather experienced last winter masks the underlying weakness in the UK economy. The Office for National Statistics (ONS) preliminary estimate of GDP suggests the underlying level of output has been flat since the third quarter of 2010. We expect the economy to grow from the second quarter of this year onwards, as we can see from figure 1, but we continue to expect this growth to be relatively weak. We expect GDP growth of 1.4 per cent per annum this year; rising to 2 per cent in 2012.

Economic recovery is defined as a period over which the negative output gap is reduced, which happens when GDP growth is above its trend (or potential) rate. On this basis the UK economy cannot be said to be currently in a recovery phase of the economic cycle. We do not expect the UK to grow more rapidly than the trend rate of 2.1 per cent per annum until 2013. In that year the level of GDP should finally recover the pre-recession peak seen in the first quarter of 2008. Output growth will be weak in part clue to the scale of the fiscal contraction that is underway and it is difficult to see how it will strengthen significantly in the short term.

This year and next we expect there to be little contribution from domestic demand to overall GDP growth. Economic expansion is expected to be driven by net trade. Over the period 2011-13 we expect it to make its largest and most sustained contribution to GDP growth since at least 1960 (see figure 2). However, this contribution is not the result of exceptional export volume growth. As figure 2 shows, contributions to growth from exports volumes are similar to those seen following sterling's exit from the ERM and consequent depreciation. The net trade contribution is strong because the demand for imports from within the UK is exceptionally weak. The onset of the government's plan for fiscal consolidation, the impact of increasing commodity prices and the ending of the stock cycle are all expected to reduce growth in the demand for imports. In addition the domestically-focused sectors of the UK economy competing with imports are likely to have received a boost from price-competitiveness due to the depreciation of the sterling effective exchange rate since mid-2007.

Consumer spending is likely to decline by 0.6 per cent this year and this is the major factor behind the weakness in domestic demand growth. Real personal disposable income is expected to decline by 1.3 per cent in 2011 following the 0.8 per cent fall last year, and this can be expected to put significant downward pressure on consumer spending. Households face a number of structural pressures that have implications for household incomes. These are mainly to do with the impacts of the economic crisis and oil price increases. The aggregate effect of fiscal consolidation on household incomes is likely to have little lasting effect as taxes would have had to be raised at some time in the future to pay down the debt stock.

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The financial crisis induced a re-pricing of risk, implying a higher cost of capital for investment. We expect to see two interrelated outcomes from this, the shift to a lower equilibrium capital stock implying lower equilibrium real incomes and also an increase in capital's share of income. In addition, the sharp rise in unemployment is likely to reduce potential output via the labour market scar from the experience of unemployment (see Bell and Blanchflower, 2010). As Barrell and Kirby (2011) discussed, overall these effects are expected to have reduced real output, and hence incomes, by around 4 per cent. In addition the permanent increase in the oil price of close to $40 since our October 2010 forecast should result in a permanent loss of real incomes of around I per cent. Around half of this will come from a reduction in capacity output because of the increase in oil input prices. The rest of the effect comes through the terms of trade, given that a rise in oil prices redistributes incomes from consumers to producers. The terms of trade since the end of 2007 have proved to be relatively stable, as export prices have increased in line with import prices (table A4), despite the depreciation of sterling.

As noted in our January forecast, oil prices were expected to be $18 a barrel higher than in our October 2010 forecast, adding around 0.7 percentage points to the rate of consumer price inflation in 2011. The recent turmoil in North Africa and the Middle East has pushed the price of oil even higher, by an additional $18 a barrel. The further increase in oil prices is expected to increase the rate of inflation this year by an additional 0.4 percentage points this year and a similar amount next year. We expect the rate of CPI inflation to rise towards 5 per cent in the second half of the year as the effect of rising oil prices feeds through into consumer prices (figure 3). (1) There is an additional effect of the increase in the standard rate of VAT. The ONS has estimated that the immediate pass-through has been around 0.76 percentage points, similar to the figure implied by the Bank of England's Agents" Summary of Business Conditions. Clearly, even in the absence of the VAT increase, inflation in the UK is expected to have persisted above target throughout the year.

The current state of the economy--weak GDP growth and increasing rates of inflation--poses a dilemma for the MPC. In the longer term, if underlying real interest rates are 3 per cent and the inflation target is 2 per cent, we should expect to see nominal interest rates of around 5 per cent, and hence we should expect rates to rise at some point as the economy recovers. The current stance of monetary policy is loose and tightening does need to commence, especially given the current rate of inflation. It is likely that, in the absence of fiscal tightening on the scale planned for this year, the MPC would have already increased rates. We would suggest that fiscal policy is too tight and monetary policy too loose. However, it would he wrong to suggest that the effects on output of looser fiscal policy would be completely offset by those from tighter monetary policy. The effect of fiscal policy on output feeds through more quickly than do changes in monetary policy, and a rebalancing would strengthen growth in the short term. The looseness of monetary policy raises the risks to future inflation rather than impacts on the current level, but in current conditions we would not expect to see a rapid tightening.

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Market expectations for interest rates have moved markedly since our January 2011 forecast was completed. Yield curves imply that the MPC will raise interest rates just twice this year and in our forecast we have followed that pattern. As figure 4 shows, the Government liability yield curve implies these increases will occur in September and December of this year. Figure 4 also highlights how market expectations have moved since the summer of 2010. One of the main concerns for the MPC seems to be the risk of inflation expectations shifting, diminishing the effectiveness of monetary policy. While household inflation expectations for twelve months ahead have continued to rise, they are not out of line with actual inflation, as we can see from figure 5. Certainly the regular pay component of Average Weekly Earnings (a measure of underlying pay pressures) suggests that nominal wages increased by 2.2 per cent per annum in the three months to February, suggesting that real wages are still falling. As figure A1 shows, this weakness in wage growth is in both the private and public sectors. But concerns with regard to the anchor on inflation expectations should not be entirely dismissed. As we show in Box A, a drift of 1 per cent in inflation expectations for one year will feed into wage bargains and raise inflation by about 0.25 percentage points in that year even if the Bank of England reacts.

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Fiscal policy has changed little since our January forecast. This year's Budget introduced a plethora of discretionary policy decisions. However, the overall effect is expected to be fiscally neutral. The Office for Budget Responsibility (OBR) continues to expect the main target of the Chancellor's Fiscal Mandate to be met. The OBR has revised its forecast for the balance on the current budget from a surplus of 0.3 to a deficit of 0.2 per cent of GDP. Such revisions are well within the margins of forecast error, but almost all this downward revision is cyclical rather than structural and hence it suggests that the Chancellor's primary fiscal target is still likely to be met. (2) In contrast, with the overall plan unchanged, we continue to expect the Chancellor to miss his target, as we expect tax revenues to be structurally weaker than does the OBR.

Prices and earnings

The annual rate of CPI inflation has continued to deviate from target, reaching 4.4 per cent in February 2011. Throughout 2010 the rate of CPI inflation was more than 1 percentage point above the 2 per cent target rate. Since January, however, inflation has been 2 percentage points or more above target. Even in the absence of the increase in the standard rate of VAT, the rate of inflation would have been more than 1 percentage point above target. Oil price movements since the start of the year suggest inflation will continue to rise in the short term.

The ONS attributes upward pressure in the latest CPI figures to housing and household services as well as vehicle purchases, and notably pump prices which rose by 2.7 per cent between February and March reaching record levels of 1.32 [pounds sterling] per litre for petrol and 1.38 [pounds sterling] per litre for diesel. Clearly rising fuel costs reflect the increased price of oil, which has been a contributory factor underlying inflationary pressures globally over the past year, and has fed into UK inflation through import price inflation and input costs. We estimate the world oil price to be $23 per barrel above our October 2010 forecast in the first quarter of 2011. The average of Brent Crude and Dubai prices recorded over 63 [pounds sterling] per barrel for both February and March, representing an increase of 7.26 [pounds sterling] from December. Inflationary pressures from oil prices are set to continue in the near future. Our forecast for the world oil price, which reflects information from futures markets, suggests that the oil price will rise by a further 20 per cent this quarter. However, such rates of growth are not expected to persist into next year, suggesting the strong contribution from oil prices is only temporary.

Box A. The drifting anchor

Inflation expectations play an important role in wage setting both
in NiGEM and in the world. We presume that labour markets equate
supply and demand, and that real wages are set in relation to
long-run factors mediated by unemployment and productivity, but
that in the short term expectations of and outturns for inflation
affect the dynamics of adjustment to the equilibrium. Our wage
equations are based on those in Barrell and Duty (2003) and can be
described as Layard-Nickell bargaining equations. They are normally
operated under model consistent rational expectations where
bargainers expect the outcome they will observe, but it is possible
to endogenously shock that expectation, drifting it away from the
rational expectations level. We have undertaken a simple experiment
where expected inflation endogenously increases by I percentage
point for one year and then becomes rational again. This feeds into
the wage bargain and raises wages. This will in turn reduce
employment and output as the increase in wages is not justified by
the underlying equilibrium. The Bank of England is presumed to know
all this will happen and will immediately raise policy rates to
help offset it. Exchange rates are forward looking in the
experiment and hence sterling jumps up marginally.

Figure A plots the paths for output, inflation and the policy rate
in our experiment. After an exchange rate induced minor fall,
inflation rises by up to a 1/4 of a percentage point as a result of
the I percentage point drift in the anchor. The effect is held in
check in part by the rise in interest rates (if they were constant
the effect would be noticeably higher). Output weakens because of
the increase in interest rates and the exchange rate.

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Earnings growth remains subdued in the UK. Annual earnings growth for total pay moderated to 2 per cent in the three months to February, following 2.3 per cent for the previous three-month period ending in January. Excluding bonuses provides us with a measure of underlying wage growth. On this basis wage growth was 2.2 per cent per annum in the three months to February, representing a more modest decline than for total pay. The difference between the two measures can largely be explained by the sharp contraction in bonus payments in the public sector.

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Annual growth in total earnings was 1.3 per cent in February, which is far below the 4.4 per cent annual growth of the CPI, and even further below the 5.3 per cent growth of the RPI. Figure 6 plots growth in real average weekly earnings on a monthly basis, deflated by the CPI and RPI, respectively. The sudden upward surge in real average earnings growth in the RPI measure in 2008-9 reflects a drop in RPI inflation over a period of several months due to falling housing costs associated with reduced mortgage interest payments following reductions in Bank Rate by the MPC, as well as house price depreciation. However since mid-2009 both measures of real earnings have been falling steadily. As Holland et al. (2010) note, downwards pressure on real pay growth has been a key factor in softening the impact of the recession on unemployment. We expect both real consumer and producer wages to continue to fall this year.

Demand

Domestic demand growth was robust throughout most of 2010, recording quarterly growth rates of around 0.8 to 1 per cent, but the fourth quarter recorded almost no growth. We can decompose the growth of domestic demand into contributions from each of its components, as shown for the third and fourth quarters of 2010 in figure 7, and it is clear that the comparatively strong growth in domestic demand in the third quarter of 2010 was driven by gross fixed investment and the change in inventories, with small negative contributions from consumer spending and government consumption expenditure. The weakness of demand growth in the final quarter of that year was due to a sharp fall in gross fixed investment and a further decline in consumer spending. As figure 7 shows, the continued strength of the contribution from the change in inventories prevented overall domestic demand from contracting in the final quarter of last year. In addition, government consumption made a positive, albeit small, contribution to demand growth in that quarter.

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We have incorporated data revisions for government consumption in 2010 into our latest forecast. The OBR left the outlook for the level of government consumption unchanged. We have followed this approach in our forecast. Given the outturns for 2010, this implies a modest increase in real government consumption in the first quarter of this year, but this is not expected to persist. Rather, with the implementation of real cuts in departmental current expenditures, we expect year-on-year government consumption to fall from the second quarter of this year onwards, with the annual rate of decline averaging 1 1/2 per cent over the next five years.

Export volumes growth has surged at the start of this year. Goods export volumes grew by a quarterly rate of 4.1 per cent in the three months to February. Folk)wing the sharp fall in export volumes over the period 2008 to 2009 as most advanced economies entered recession and global trade collapsed, goods export volumes have almost recovered to the level last seen in the third quarter of 2008. However, they are still currently 1 per cent below their recent peak in the second quarter of 2008.

The recovery in export growth has been dominated by demand from outside the European Union, as figure 8 illustrates. Although exports to both EU and non-EU groups of countries have been recovering since 2009, for EU demand this recovery still represents a gradual approach to the pre-recession level, whereas non-EU demand surpassed its pre-recession level in June 2010 and has been strong ever since. Over this period there was a fall in exports to EU countries, which are now 4.1 per cent below pre-recession level. The narrowing of the UK trade deficit for goods and services last month resulted from non-EU exports more than compensating for weak EU exports.

Much of the external demand from non-EU countries for UK goods and services has been from the US and this has occurred despite the sharp contraction in US import volumes at the end of last year. Exports of goods to non-EU countries rose by 3.2 billion [pounds sterling] (seasonally adjusted) over the period from December to February inclusive, and the US accounted for 23.3 per cent of that increase. The October 2010 issue of the Review noted that this shift in market structure towards trade with non-EU economies is likely to be permanent, as output in many of these (particularly non-OECD) economies does not appear to be scarred by the crisis. The latest data confirms this. We expect around 7 per cent growth in export volumes this year, dropping back somewhat over the medium term.

The sterling effective exchange rate has depreciated by around 20 per cent between mid-2007 and the end of 2010. We would expect this to produce a significant boost to export volumes due to gains in price competitiveness. However, UK exporters seem to have taken the opportunity to widen their profit margins rather than expand sales. Over the course of the financial crisis this could well have been a rational response to liquidity concerns and uncertain future demand. However, throughout 2010 the pattern of boosting profit margins has been maintained. This is clear from the fact that the gains in price competitiveness have been significantly less than the depreciation of sterling. Such boosts to profit margins could be behind the surge in the manufacturing sector's net rate of return on capital at the end of last year. This figure increased to 10.4 per cent, the highest rate of return enjoyed by the sector since the first quarter of 2008. We do not expect the widening in profit margins at the expense of volume growth to continue. Rather, we assume markets broadly work and that the depreciation of sterling will lead to relatively robust export volumes growth. Figure 9 plots growth in UK export volumes against growth in import demand in UK export markets, and illustrates that, historically, growth in UK export markets is slightly higher than growth in exports, indicating a gradual loss of market share. Over the next few years we expect some of the recent loss in market share beyond general developments in UK export markets to be regained.

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Household sector

Throughout 2008 and 2009 real disposable income growth remained robust despite the recession, However, in 2010 real disposable incomes fell by 0.8 per cent, the first annual fall since 1981. In per capita terms they fell by 1.3 per cent and this is the largest fall since at least 1972 (figure 10). Employee compensation is the largest component of household incomes. Real compensation has been declining year-on-year since 2008. Real disposable incomes have not fallen in line due to the movement in other components of household income (figure 11). In 2009 cuts in indirect taxes and reductions in net interest payments helped boost real incomes. Increases in indirect taxes have reduced real income in 2010 and 2011. Real consumer wages fell by 1.6 per cent between the third and fourth quarters of 2010 and by 1.3 per cent through 2010 as a whole. We expect real consumer wages to fall by a further 2.4 per cent this year as wage growth remains subdued in the face of a weak labour market. Real disposable incomes are expected to decline sharply, by 1.3 per cent, this year, in part due to the impact of tax increases that have come into effect in the first half of this year. We do not expect falls in real incomes to persist. As the rate of inflation eases back and productivity growth in the UK in general recovers, real wages are expected to grow by around 1 3/4-2 1/2 per cent per annum over the period 2012-15. Real incomes are expected to grow at around 2-3 per cent per annum. However, future tax increases in order to ensure the deficit reduction target of the Chancellor's Fiscal Mandate pose a downside risk to our forecast for real disposable income growth. We expect the level of real disposable incomes to reach their recent peak, seen in the final quarter of 2008, in 2013.

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The average quarterly growth rate in the volume of retail sales in the decade prior to the recession was 0.9 per cent. At the start of this year retail sales growth was significantly weaker than this. In the three months to Marcia the volumes of retail sales grew by just 0.3 per cent from the three months to December 2010. The rate of growth in the first quarter of the year should include some rebound in sales after the negative effect of the adverse weather at the end of last year, implying the underlying growth rate is even weaker.

Retail sales only account for around one third of consumer spending in the UK. Figure 12 illustrates quarterly percentage changes in consumer spending and total retail sales volumes since 2000. Growth in consumer spending as a whole has been similar but slightly less volatile than growth in retail sales, although this relationship has broken down somewhat over the course of the recession, where consumption plummeted by 1.6 per cent in the final quarter of 2008. The 2 per cent decline in retail sales volumes at the start of 2010 did not have an overly strong impact on consumption, which declined by just 0.2 per cent. But consumer spending has remained weak since, recording a 0.3 per cent decline in the final quarter of 2010. Our forecast is for consumer spending to fall by 0.6 per cent this year, due to a further fall in real incomes. We expect consumer spending to grow from 201.2 onwards at an accelerating pace, in line with the recovery to real disposable income growth.

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The household saving rate was broadly unchanged between the third and fourth quarters of 2010, reaching 5.4 per cent for the latter. This is significantly higher than the pre-recession rates of household saving which tended to lie in the 2-3 per cent range. It is possible that: we have seen a rise in precautionary saving in response to the perception of a more uncertain future. We expect the saving rate to fall to around 5 per cent in the first half of 2011, from 5.5 per cent in the second half of 2010, as households try to minimise any impacts on their standards of living from the fall in real personal disposable income. But from the second half of this year we expect the average propensity to save to begin to rise. We expect the saving rate to continue to rise towards 7 3/4 per cent by 2015. This is in part a response to the weakness in the housing market as households may no longer be able to rely on growth in house prices as the key contributor to boosting household wealth.

The March 2011 Housing Market Survey from the Royal Institute of Chartered Surveyors confirms that weakness in the housing market has continued into the start of 2011. Both new buyer enquiries and new vendor instructions remain restrained, while the Halifax and Nationwide house price indices suggest house price growth in the first quarter of this year continued to be subdued. Our preferred measure of house prices is the Department of Communities and Local Government (DCLG) mix-adjusted index. This measure has yet to record declines in nominal house prices. The Halifax and Nationwide indices lead the DCLG, suggesting the DCLG measure of house prices will report nominal annual falls in its level over the coming months.

We expect the housing market to remain weak over the coming three years, and expect nominal house prices to decline by 0.3 per cent on last year's figure. We expect nominal house prices to fall by 1 per cent in 2012. From 2014 onwards our projection shows house prices rising in nominal terms. In real terms, however, the picture is significantly weaker. We expect real house prices to fall by 4.5 per cent in 2011 and by an average of 1 1/2 per cent per annum over the subsequent four years. In the medium term, as inflation returns to its 2 per cent target, our forecast is for real house prices to level off at around 20 per cent below their peak in the first quarter of 2008. Real house price growth will be held back as interest rates are expected to rise in the future and loans are expected to be less freely available than before the crisis (see Barrell, Kirby and Whitworth in this Review).

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One noticeable feature of the housing market in this recession, in comparison to the recession of the early 1990s, is that the rate of mortgage arrears has increased relatively moderately. Figure 13 plots the percentage of total outstanding mortgages more than six months in arrears. At the peak, the percentage of households defaulting on their mortgage obligations was just over a third of the peak in 1992. Interest rates were very high in 1992 and the difference in arrears is attributable to the Bank of England's response to the crisis. The figure shows that mortgage arrears had begun to rise in 2008 but soon after the Bank began to make aggressive cuts to the policy rate, the increase in mortgage arrears began to stall and even fall slightly as Bank Rate remained at 0.5 per cent. Decreases in Bank Rate feed through into mortgage contracts, making servicing debt obligations more affordable for households (see figure AS). The Bank of England's Credit Conditions Survey suggests that mortgage arrears have risen in the first quarter of this year and that lenders expect the rate of mortgage arrears to continue to rise in the second quarter. If these survey results are born out in the data then it will be of particular concern, especially given that this is occurring before mortgage rates have even begun to rise. It is quite probable that we will see further increases in the rate of mortgage arrears as interest rates rise to more 'normal' levels over the course of the next five years.

Supply conditions

Both manufacturing and non-manufacturing sectors experienced sharp falls in their capital expenditures over the period 2008-9. By the end of 2009 the volume of manufacturing investment had fallen by 30.9 per cent from the level seen in the first quarter of 2008. Non-manufacturing capital expenditures declined by 23 per cent over the same period. The volume of both manufacturing and non-manufacturing capital expenditures began to grow in 2010. Even so, the average level of manufacturing investment in 201.0 was 5.1 per cent below the level in 2009. The sharp fall in manufacturing investment in 2009 is most likely due to the sharp fall in exports as global trade collapsed. One of the key drivers of investment decisions is future demand and it is unsurprising that capital expenditures experienced such a sharp fall.

Conditions for business investment are improving. The gains in price competitiveness for the UK's external sector should raise the demand for capital investment in the manufacturing sector. In addition, the recent increase in the net rate of return on capital in the manufacturing sector should also stimulate investment. Nonmanufacturing investment should also continue to expand. Real interest rates are currently negative, lower than at any point since the late 1970s. The price of investment goods continues to grow at a lower rate than general price inflation. In addition, large firms have significant amounts of cash on their balance sheets. Such factors should lead to a significant surge in business investment. However, major risks to the outlook for demand remain. Uncertainties about the spillover from sovereign debt crises in the Euro Area, and the rise in oil prices, are probably causing some hesitancy on the part of firms when it comes to capital expenditure plans. We should also note that there is a significant amount of spare capacity in the UK at the moment. Manufacturing output is still around 8.4 per cent below the pre-recession peak in the first quarter of 2008. Clearly, there is capacity available to meet any pick-up in demand, despite responses to the CBI's Industrial Trends survey and the Bank of England's Agents' Summary of Business Conditions, which both suggest limited spare capacity in the production sector. In addition, the permanent increase hi the user cost of capital implies a downward shift in the equilibrium capital-output ratio in the UK (Haugh, Olivaud and Turner, 2009). Additionally, the lack of corporate insolvencies means that less of the UK's capital stock was permanently lost than in previous recessions. We expect business investment to increase by 6 1/2 per cent per annum this year, before rising by between 4 1/2-5 per cent per annum between 2012 and 2015.

Unemployment fell back at the start of 2011, but the monthly labour market statistics are quite volatile. We expect unemployment to rise this year due to a decline in demand for employees, as employers raise their labour input through hours worked rather than the number of their employees. The three months ending in January 2011 saw 1.4 per cent growth in total employment on the same three months of the previous year, which represented the recessionary trough in employment. This increase is almost entirely due to growing employment in part-time positions, which saw a year-on-year increase of 3.3 per cent for the same three months, whereas full-time employment increased by only 0.6 per cent. The demographic dynamics behind this change are also notable, as there was a far greater increase in employment among men (1.9 per cent) than among women (0.7 per cent). In particular, there was a large increase in men employed in part-time positions (6.5 per cent). There was also an increase in women in part-time positions, but more significantly the amount of women in full-time employment actually declined over this period.

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Total employment in the UK is now only 1.4 per cent below its recent peak, seen in the second quarter of 2008. Figure 14 plots the progress made in employment relative to the recessions of the 1980s and 1990s. We expect employment to recover to its pre-recession levels in the third quarter of 2013, which is one/two years faster than following the recessions of the 1980s and 1990s, respectively. This is likely to happen despite job losses due to the government's fiscal consolidation plans over the next few years. The relative strength of employment in this recession reflects the response of real wages discussed above.

As shown in figure 15, labour productivity, as measured by output per worker and output per hours worked, has not yet recovered to its pre-recession peak. Productivity fell sharply over the course of the recession, and falls in labour productivity in a period of declining demand imply that labour hoarding has been taking place. In the US, this has not occurred, and contrarily labour productivity has actually risen. Labour hoarding imposes a cost on the economy in terms of input costs to firms. The response of real product wages in the UK, in comparison to the US, explains why this hoarding was able to take place; the relative flexibility in UK real wages has enabled firms to lower input costs and retain some part of their work forces. Average hours worked also fell over the course of recession, but not in line with demand. The reduction in employee working hours is another mode by which firms have been able to retain employees, which is confirmed by the rise in part-time employment as against full-time employment as discussed above. We expect productivity growth, measured by both output per worker and output per hour worked, to be weak over the coming few years, and the pre-recession peak for each will be reached in 2013.

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Productivity in the manufacturing sector, on the other hand, has been robust. Output per manufacturing job recorded annualised growth rates of 6.1 per cent through the first half of 2010 and this rose to 7.5 per cent through the second half. Output per hour in the sector has recorded annualised growth rates ranging between 3.4 and 5.5 per cent over 2010, which is still robust but somewhat less than the alternative measure of productivity. This suggests that increases in labour input in the manufacturing sector have arisen through increased hours worked rather than increases in the number of jobs.

Public finances

The recent Budget contained a significant number of policy announcements but, unsurprisingly, was broadly fiscally neutral. The Chancellor announced a number of tax changes. The most significant was the reform of fuel duties, offset by an increase in the supplementary charge on the oil and gas sector. (3) The Chancellor expects the reform of fuel duty to cost the Exchequer around 2 billion [pounds sterling] per annum in 2011-12. The delayed implementation of the increase in line with the RPI means that the cost is expected to fall to 1.6 billion [pounds sterling] in 2012-.13 and then rise to 1.7 billion [pounds sterling] in 2013-14 and 2.1 billion [pounds sterling] in each of fiscal years 2014-15 and 2015-16. The revenue gains from the supplementary charge are expected to be between 1.8 billion [pounds sterling] and 2.2 billion [pounds sterling] over the next five fiscal years. Given the OBR's oil price projection, this shift in tax is permanent over the next five years. The reduction in the main rate of corporation tax is welcome, helping to reduce the cost of capital faced by firms. However, the effect of a further 1 percentage point reduction in the rate of corporation tax on top of last June's plans will have only a modest effect. Lost revenues will amount to around 1 billion [pounds sterling] per annum by 2014-15. The Chancellor has turned to measures to limit tax avoidance and evasion to ensure the fiscal neutrality of his Budget. These measures are expected to raise additional revenues of around 1.3 billion [pounds sterling] by 2015-16. We must wait and see if outturns match what the Chancellor expects.

We assume that the expenditure plans for resource departmental expenditures in current and capital terms are broadly met over the course of the current Spending Review period (2011-12 to 2014-15). The other components of spending are endogenously determined in our global econometric model NiGEM. These are broadly unchanged in comparison to our January forecast, as are Government bond yields in the UK. Higher rates of inflation in the second half of this year will raise the level of expenditure on social security payments from next fiscal year onwards by around 2-3 billion [pounds sterling] per annum. Tax receipts are also endogenously determined with our model NiGEM. They grow in line with the tax base, adjusting tax rates due to announced policy changes. Indirect tax receipts are expected to be around 4 billion [pounds sterling] lower than in our January forecast in each year from 2011-12. Around half of this is due to weaker than expected tax receipts from last year that we assume will persist. The additional 2 billion [pounds sterling] reduction is due to announced policy changes, in particular the introduction of the fair fuel stabiliser. Taxes on incomes are weaker going forward than we previously projected, despite a boost to tax revenues from taxes paid by the oil and gas sector, due to the increase in the supplementary charge and higher oil prices. In particular, we expect weaker direct taxes from households, in part because of the negative effect of high oil prices on the economy, but also because we have assumed some of the weakness in the effective tax take on household incomes at the end of last year persists.

These changes, in aggregate, are relatively modest. From 2011-12 onwards the deficit on the current budget is expected to be around 1/2 per cent of GDP larger in each fiscal year than previously projected. (4) Given that the forecast for net investment is little changed, our forecast for public sector net borrowing has also increased by around 1/2 per cent of GDP in each fiscal year. 'The OBR has revised its projections by a similar amount to 2015-16, and now expects a deficit on the current budget of 0.2 per cent of GDP, rather than a surplus of 0.3 per cent of GDP. The OBR has assumed that the adjustments to the forecast are cyclical. As such the OBR expects the surplus on the cyclically-adjusted current budget to remain at just under 1 per cent of GDP. On the basis of our forecast we do not expect the Chancellor to hit his fiscal target of a balanced cyclically adjusted budget in five years' time. But the benefit of the new fiscal framework is that the Chancellor has time to respond. Indeed this benefit would have allowed the Chancellor to have temporarily boosted demand in this Budget through targeted temporary tax cuts. We do not think that missing the fiscal target by a small margin would affect 'confidence' and we would not advocate any further tightening over the next couple of years.

Accumulation

When national saving is below the level of investment in an economy, finance from abroad is required and is observed in the form of a current account deficit. This gives no indication as to whether the level of investment is too high or low; it simply highlights the fact that national saving is not high enough to fund investment. The figures presented in table A9 show saving and investment, as a per cent of GDP, on a sectoral basis and gross of depreciation.

Gross fixed investment was the equivalent of 14.9 per cent of GDP in 2010. If we assume a depreciation rate of 5 per cent and that potential growth is around 2.1 per cent per annum over the medium term, then this scale of investment is enough to maintain the capital--output ratio at 2.1. In the few years prior to the onset of the financial crisis the UK capital-output ratio was around this figure. In 2009 it rose to 2.3, but this was due to a fall in the denominator. Investment below 1.4.9 per cent of GDP will bring the capital-output ratio down more sharply. We expect to see investment, as a share of GDP, weaken over the next few years before rising back to 14.9 per cent in 2015 and hence the capital output ratio will fall. The softening in investment is due. in part, to government investment falling back to around 1.3 per cent of GDP from 2.5 per cent of GDP in 2010, as current government spending plans suggest. ]'he implication of this is that we see little support for an investment 'boom' beyond the pace of growth presented in table A6. If the depreciation rate, potential growth or the desired capital-output ratio proves to be higher, then the rate of growth in gross fixed investment will need to be even more robust than we currently project.

If the investment needs of the UK are to be met domestically then saving in the UK is too low. The simultaneous financial retrenchment of the household and government sectors of the economy are expected to increase national saving from 12.4 per cent of GDP in 2010 to almost 16 per cent of GDP in 2015. Given that capital consumption is the equivalent of 10 per cent of GDP in the UK, net national saving is expected to increase to a more modest level, rising from 0.8 per cent of GDP in 2009 to 5 per cent by 2015. In order to maintain national wealth constant as a ratio to income, net national saving would have to stay around this level permanently. However, the level of national wealth is probably too low for the UK's needs, especially those associated with retirement. Saving in excess of investment is needed in countries with ageing populations, such as the UK. Failing to increase the rate of saving without reform of future pension commitments will pose future fiscal problems on an increasing scale. The government appears to recognise problems with regard to future pension commitments. The consultation on pension reform includes a suggestion to uprate state pension ages automatically in line with rising life expectancy. Such a move would help to ease the fiscal burden from the expected future increases in life expectancy (see Department for Work and Pensions, 2011).

The medium term

Our estimate of the trend rate of GDP growth in the UK over the medium term is around 2.1 per cent per annum. This is significantly below the trend rate of growth of around 2.6 per cent in the ten years prior to 2008. Trend growth is determined by capital and labour inputs and growth in total factor productivity, which in turn is determined by factor input augmenting technical progress. We assume the re-pricing of risk that has raised the user cost of capital is permanent, implying a period of capital shallowing over the medium term. Labour force growth is expected to moderate over the medium term mainly due to a slowdown in the net inward migration (see Barrell et al., 2009). Statements by government suggest that limiting migration is one of the government's current aims. If successful, this could well reduce the trend rate of growth even further. However, given that emigration and much inward migration (from EU citizens and returning UK citizens), is beyond the direct control of government, it is possible that net inward migration will continue to be higher than we assume, raising the labour force and the trend rate of growth.

The increases in the labour force would have been even lower, but for the increase in the state pension age for women currently taking place. The government has announced its intention to raise the state pension age to 66 over the period 2018-20, effectively bringing forward this planned increase from 2024 to 2026. The effect of this increase in the state pension age will make little difference to the forecast presented in table A10. However, it should raise trend growth for the period 2020-25. (5) If the current discussion about how best to raise the state pension age in the future (see Department for Work and Pensions, 2011) results in a more rapid increase in the state pension age than currently planned, then we should expect to see the trend rate of growth raised even further.

We expect above trend growth over the medium term as the UK's negative output gap of around 4 per cent is closed. It is a gradual process, in part because the fiscal consolidation programme inhibits growth over the next five years. We expect GDP growth to be around 0.4 percentage points above trend in the medium term. The medium-term view for the UK is a shift to a more balanced economy, with more national saving and less current consumption, as we can see from the return of the current account to surplus by 2014, the first since 1983. Of course the UK could experience more rapid growth over the medium term. Stronger consumer spending growth fuelled by lower saving and possibly rising debt relative to incomes would close the output gap more rapidly. More rapid growth would improve the position of the public finances by more than we project. In addition, consumer spending is tax rich relative to other components of expenditure, implying an even more rapid reduction in the structural budget deficit in this scenario. However, lower levels of household saving may not be wise.

Growth in output could be noticeably more rapid if we were to see significant increases in housebuilding. This could result from the effects of the suggestions from reforms to the planning system contained in the government's Plan for Growth. If this were to result in a significant expansion of housebuilding then both actual and trend GDP growth could be higher than forecast. Dow (1998) suggested that a housebuilding boom was one of the main contributory factors to the first phase of the UK's recovery from the Great Depression. However, planning reform is very problematic and there may be immovable objects holding it back.

Public sector net borrowing is expected to average around 2.6 per cent of GDP over the period 2016-20, returning borrowing to the level last seen in 2007. Public sector net debt will fall gradually as a per cent of GDP. At some point in the future the government will sell its equity stakes in the nationalised banks. It would be wise to use such windfalls to reduce government debt if we are to be fair to future generations and prepare for the next crisis.

DOI: 10.1177/0027950111411373

Appendix--Forecast details

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Table A1. Exchange rates and interest rates

                                                               FTSE
                              UK exchange rates             All-share
                                                              index
                      Effective      Dollar       Euro
                      2005 = 100

2005                    100.00        1.82        1.46        2587.6
2006                    100.75        1.84        1.47        3022.6
2007                    102.89        2.00        1.46        3306.3
2008                     90.69        1.85        1.26        2728.0
2009                     81.16        1.57        1.12        2326.0
2010                     81.01        1.55        1.17        2818.3
2011                     80.55        1.b2        1.14        3098.0
2012                     80.74        1.63        1.14        3073.0
2013                     81.58        1.62        1.16        3167.4
2014                     82.31        1.62        1.17        3303.0
2015                     83.07        1.62        1.18        3451.7

2010 Q1                  80.05        1.56        1.13        2778.8
2010 Q2                  80.40        1.49        1.17        27b5.9
2010 Q3                  82.50        1.55        1.20        2744.2
2010 Q4                  81.09        1.58        1.16        2984.1

2011 Q1                  81.50        1.60        1.17        3085.1
2011 Q2                  80.14        1.63        1.13        3116.4
2011 Q3                  80.24        1.63        1.13        3099.2
2011 Q4                  80.24        1.63        1.13        3091.3

2012 Q1                  80.43        1.63        1.14        3079.5
2012 Q2                  80.64        1.63        1.14        3064.8
2012 Q3                  80.85        1.63        1.14        3063.6
2012 Q4                  81.06        1.62        1.15        3084.2

Percentage changes

2005/2004                -1.6          -0.7        -0.9        15.0
2006/2005                 0.7           1.3         0.4        16.8
2007/2006                 2.1           8.6        -0.4         9.4
2008/2007               -11.9          -7.4       -14.0       -17.5
2009/2008               -10.5         -15.5       -10.6       -14.7
2010/2009                -0.2          -1.2         3.8        21.2
201l/2010                -O.6           4.9        -2.1         9.9
2012/2011                 0.2           0.2        -0.1         0.8
2013/2012                 1.0          -Q.3         1.3         3.1
2014/2013                 0.9          -0.2         1.2         4.3
2015/2014                 0.9           0.0         1.1         4.5

2010Q4/2009Q1             0.3          -3.3         5.2        11.3
2011Q4/2010Q1            -1.1           3.0        -2.6         3.6
2012Q4/2011Q1             1.0          -0.3         1.2        -0.2

                                     Interest rates

                      3-month    Mortgage     10-year    World (a)
                       rates     interest      gilts

2005                    4.7         6.5         4.4         3.1
2006                    4.8         6.5         4.5         4.0
2007                    6.0         7.4         5.0         4.6
2008                    5.5         6.9         4.5         3.4
2009                    1.2         4.0         3.7         1.1
2010                    0.7         4.0         3.6         1.0
2011                    1.0         4.3         3.7         1.3
2012                    1.6         4.8         4.0         2.1
2013                    2.5         5.5         4.3         3.0
2014                    3.2         5.9         4.5         3.6
2015                    3.5         6.l         4.7         4.1

2010 Q1                 0.6         4.1         4.1         0.9
2010 Q2                 0.7         4.0         3.7         1.0
2010 Q3                 0.8         3.9         3.2         1.0
2010 Q4                 0.8         3.9         3.3         1.0

2011 Q1                 0.8         4.1         3.7         1.0
2011 Q2                 0.8         4.1         3.7         1.3
2011 Q3                 1.0         4.4         3.7         1.4
2011 Q4                 1.2         4.6         3.8         1.5

2012 Q1                 1.2         4.6         3.9         1.8
2012 Q2                 1.5         4.8         4.0         2.0
2012 Q3                 1.7         4.9         4.1         2.3
2012 Q4                 1.9         5.1         4.2         2.5

Percentage changes

2005/2004
2006/2005
2007/2006
2008/2007
2009/2008
2010/2009
201l/2010
2012/2011
2013/2012
2014/2013
2015/2014

2010Q4/2009Q1
2011Q4/2010Q1
2012Q4/2011Q1

                     Interest
                       rates

                       Bank
                     Rate (b)

2005                   4.50
2006                   5.00
2007                   5.50
2008                   2.00
2009                   0.50
2010                   0.50
2011                   1.00
2012                   2.00
2013                   2.75
2014                   3.25
2015                   3.75

2010 Q1                0.50
2010 Q2                0.50
2010 Q3                0.50
2010 Q4                0.50

2011 Q1                0.50
2011 Q2                0.50
2011 Q3                0.75
2011 Q4                1.00

2012 Q1                1.25
2012 Q2                1.50
2012 Q3                l.75
2012 Q4                2.00

Percentage changes

2005/2004
2006/2005
2007/2006
2008/2007
2009/2008
2010/2009
201l/2010
2012/2011
2013/2012
2014/2013
2015/2014

2010Q4/2009Q1
2011Q4/2010Q1
2012Q4/2011Q1

Notes: We assume chat bilateral exchange rates for the fourth quarter
of this year are the average of the first two weeks of April. We then
assume that bilateral rates remain constant for the final two quarters
of 2011 before moving in-line with the path implied by the backward-
looking uncovered interest rate parity condition based on interest
rate differentials relative to the US. (a) Weighted average of central
bank intervention rates in OECD economies. (b) End of period.

Table A2. Price indices

2006=100

                       Unit       Imports      Exports       Whole-
                      labour      deflator     deflator    sale price
                       costs                                index (a)

2005                    97.7        97.1         97.2          98.5
2006                   100.0       100.0        100.0         100.0
2007                   102.7       100.2        101.6         101.4
2008                   105.1       112.1        113.7         105.1
2009                   111.2       116.2        116.8         107.7
2010                   113.0       121.3        121.9         111.0
2011                   113.7       132.0        130.1         114.8
2012                   115.5       134.9        131.3         118.8
2013                   117.9       135.0        132.2         121.5
2014                   120.2       136.6        133.8         123.7
2015                   122.2       138.7        135.7         126.0

Percentage changes

2005/2004                2.6         3.7          1.0           1.0
2006/2005                2.4         2.9          2.8           1.5
2007/2006                2.7         0.2          1.6           1.4
2008/2007                2.3        12.0         12.0           3.7
2009/2008                5.8         3.6          2.7           2.5
2010/2009                1.6         4.4          4.4           3.0
2011/2010                0.6         8.9          6.7           3.4
2012/2011                1.7         2.2          1.0           3.4
2013/2012                2.0         0.1          0.6           2.3
2014/2013                0.1         1.2          1.3           1.9
2015/2014                1.7         1.5          1.4           1.8

2010Q4/2009Q            10.6         5.6          4.8           3.0
2011Q4/2010Q            10.9         9.6          6.4           4.0
2012Q4/2011Q            12.0        -0.4         -0.2           2.9

                                                     GDP
                        World       Consump-      deflator
                      oil price       tion         (market
                       ($) (b       deflator       prices)

2005                     51.8          97.4          97.0
2006                     63.4         100.0         100.0
2007                     70.5         102.9         103.0
2008                     95.7         106.1         106.1
2009                     61.8         107.5         107.6
2010                     78.8         112.1         110.7
2011                    115.3         117.1         114.2
2012                    123.7         119.3         116.0
2013                    131.1         121.2         118.1
2014                    136.6         123.5         120.3
2015                    139.8         126.0         122.6

Percentage changes

2005/2004                44.4           2.4           2.0
2006/2005                22.4           2.7           3.0
2007/2006                11.2           2.9           3.0
2008/2007                35.7           3.1           3.0
2009/2008               -35.4           1.3           1.4
2010/2009                27.6           4.3           2.9
2011/2010                46.3           4.4           3.2
2012/2011                 7.2           1.9           1.6
2013/2012                 6.0           1.6           1.8
2014/2013                 4.2           1.9           1.9
2015/2014                 2.4           2.0           1.9

2010Q4/2009Q             13.8           4.6           2.7
2011Q4/2010Q             42.6           4.0           3.0
2012Q4/2011Q              2.7           1.4           1.4

                       Retail price index

                        All       Excluding    Consumer
                       items      mortgage      prices
                                  interest       index

2005                    96.9         97.1         97.7
2006                   100.0        100.0        100.0
2007                   104.3        103.2        102.3
2008                   108.4        107.6        106.0
2009                   107.9        109.8        108.3
2010                   112.8        115.0        111.9
2011                   119.0        121.1        116.9
2012                   122.5        123.9        119.1
2013                   125.7        126.4        121.1
2014                   129.2        129.5        123.4
2015                   132.6        132.7        125.8

Percentage changes

2005/2004                2.8          2.3          2.1
2006/2005                3.2          2.9          2.3
2007/2006                4.3          3.2          2.3
2008/2007                4.0          4.3          3.6
2009/2008               -0.5          2.0          2.2
2010/2009                4.6          4.8          3.3
2011/2010                5.5          5.3          4.5
2012/2011                3.0          2.3          1.9
2013/2012                2.5          2.1          1.6
2014/2013                2.8          2.4          1.9
2015/2014                2.7          2.5          2.0

2010Q4/2009Q             4.7          4.7          3.4
2011Q4/2010Q             5.4          4.9          4.4
2012Q4/2011Q             2.4          1.8          1.4

Notes: (a) Excluding food, beverages, tobacco and petroleum products.
(b) Per barrel, average of Dubai and Brent spot prices.

Table A3. Gross domestic product and components of expenditure

pounds sterling] billion, 2006 prices

                       Final consumption
                         expenditure

                      Households     General
                     & NPISH (a)      gov't

2005                    836.6         281.3
2006                    852.0         285.2
2007                    870.8         288.8
2008                    874.5         293.5
2009                    846.9         296.3
2010                    851.6         298.6
2011                    846.3         297.7
2012                    851.0         293.9
2013                    865.1         288.5
2014                    883.1         281.7
2015                    903.6         276.9

Percentage changes

2005/2004                 2.2           2.0
2006/2005                 1.8           1.4
2007/2006                 2.2           1.3
2008/2007                 0.4           1.6
2009/2008                -3.2           1.0
2010/2009                 0.6           0.8
2011/2010                -0.6          -0.3
2012/2011                 0.6          -1.3
2013/2012                 1.7          -1.8
2014/2013                 2.1          -14
2015/2014                 2.3          -1.7

Decomposition of growth in GDP (d)

2006                      1.2           0.3
2005                      1.4           0.4
2006                      1.2           0.3
2007                      1.4           0.3
2008                      0.3           0.3
2009                     -2.0           0.2
2010                      0.4           0.2
2011                     -0.4          -0.1
2012                      0.4          -0.3
2013                      1.0          -0.4
2014                      1.3          -0.5
2015                      1.4          -0.3

                               Gross capital                  Domestic
                                formation                      demand

                          Gross           Changes in
                     fixed investment   inventories (b)

2005                       213.6               4.6             1336.6
2006                       227.2               5.5             1369.9
2007                       245.1               7.4             1412.0
2008                       232.8               1.4             1402.2
2009                       197.0             -14.8             1325.5
2010                       203.0               3.5             1356.7
2011                       206.3               4.8             1354.9
2012                       210.8               4.8             1360.5
2013                       218.7               4.8             1377.2
2014                       230.3               4.8             1399.9
2015                       242.6               4.8             1427.9

Percentage changes

2005/2004                    2.4                                  2.1
2006/2005                    6.4                                  2.5
2007/2006                    7.8                                  3.1
2008/2007                   -5.0                                 -0.7
2009/2008                  -15.4                                 -5.5
2010/2009                    3.0                                  2.4
2011/2010                    1.6                                 -0.1
2012/2011                    2.2                                  0.4
2013/2012                    3.8                                  1.2
2014/2013                    5.3                                  1.7
2015/2014                    5.4                                  2.0

Decomposition of growth in GDP (d)

2006                         1.1               0.1                2.6
2005                         0.4              -0.1                2.2
2006                         1.1               0.1                2.6
2007                         1.3               0.1                3.2
2008                        -0.9              -0.4               -0.7
2009                        -2.6              -1.2               -5.6
2010                         0.5               1.4                2.4
2011                         0.3               0.1               -0.1
2012                         0.3               0.0                0.4
2013                         0.6               0.0                1.2
2014                         0.8               0.0                1.6
2015                         0.9               0.0                2.0

                        Total          Total          Total
                     exports (c)       final       imports (c)
                                    expenditure

2005                    340.3          1676.8         384.5
2006                    378.0          1747.9         419.6
2007                    368.3          1780.3         416.3
2008                    372.1          1774.3         411.1
2009                    334.6          1660.1         362.0
2010                    352.2          1708.9         392.9
2011                    376.5          1731.4         398.4
2012                    392.6          1753.1         393.8
2013                    416.8          1794.0         404.1
2014                    443.9          1843.8         420.6
2015                    464.3          1892.1         436.4

Percentage changes

2005/2004                 7.9             3.2           7.1
2006/2005                11.1             4.2           9.1
2007/2006                -2.6             1.9          -0.8
2008/2007                 1.0            -0.3          -1.2
2009/2008               -10.1            -6.4         -11.9
2010/2009                 5.3             2.9           8.5
2011/2010                 6.9             1.3           1.4
2012/2011                 4.3             1.3          -l.1
2013/2012                 6.2             2.3           2.6
2014/2013                 6.5             2.8           4.1
2015/2014                 4.6             2.6           3.8

Decomposition of growth in GDP (d)

2006                      2.9             5.5          -2.7
2005                      2.0             4.2          -2.0
2006                      2.9             5.5          -2.7
2007                     -0.7             2.4           0.2
2008                      0.3            -0.4           0.4
2009                     -2.8             8.4           3.6
2010                      1.4             3.8          -2.4
2011                      1.8             1.7          -0.4
2012                      1.2             1.6           0.3
2013                      1.8             3.0          -0.8
2014                      1.9             3.6          -1.2
2015                      1.4             3.4          -1.1

                         Net         GDP
                       trade          at
                                    market
                                    prices

2005                    -44.2       1292.3
2006                    -41.5       1328.4
2007                    -48.0       1364.0
2008                    -39.0       1363.1
2009                    -27.4       1296.7
2010                    -40.7       1312.9
2011                    -21.9       1330.8
2012                     -1.2       1357.0
2013                     12.7       1388.7
2014                     23.3       1423.6
2015                     27.8       1457.7

Percentage changes

2005/2004                              2.2
2006/2005                              2.8
2007/2006                              2.7
2008/2007                             -0.1
2009/2008                             -4.9
2010/2009                              1.3
2011/2010                              1.4
2012/2011                              2.0
2013/2012                              2.3
2014/2013                              2.5
2015/2014                              2.4

Decomposition of growth in GDP (d)

2006                      0.2          2.8
2005                      0.0          2.2
2006                      0.2          2.8
2007                     -0.5          2.7
2008                      0.7         -0.1
2009                      0.9         -4.9
2010                     -1.0          1.3
2011                      1.4          1.4
2012                      1.6          2.0
2013                      1.0          2.3
2014                      0.8          2.5
2015                      0.3          2.4

Notes: (a) Non-profit institutions serving households. (b) Including
acquisitions less disposals of valuables and quarterly alignment
adjustment. (c) Includes Missing Trader Intra-Community Fraud. (d)
Components may not add up to total GDP growth due to rounding and the
statistical discrepancy included in GDP.

Table A4. External sector

                       Exports        Imports          Net
                     of goods (a)   of goods (a)     trade in
                                                    goods (a)

                     [pounds sterling] billion, 2006 prices (b)

2005                    218.6          289.7          -71.1
2006                    243.6          319.9          -76.3
2007                    218.5          311.3          -92.8
2008                    221.5          305.7          -84.1
2009                    194.2          267.3          -73.0
2010                    215.1          297.1          -82.0
2011                    238.7          304.1          -65.4
2012                    249.0          299.8          -50.8
2013                    264.3          307.3          -42.9
2014                    281.3          320.0          -38.6
2015                    293.4          332.1          -38.7

Percentage changes

2005/2004                 8.9            7.0
2006/2005                11.5           10.4
2007/2006               -10.3           -2.7
2008/2007                 1.4           -1.8
2009/2008               -12.3          -12.6
2010/2009                10.7           11.2
2011/2010                11.0            2.3
2012/2011                 4.3           -1.4
2013/2012                 6.2            2.5
2014/2013                 6.4            4.1
2015/2014                 4.3            3.8

                       Exports        Imports          Net
                          of             of          trade in
                       services       services       services

                      [pounds sterling] billion, 2006 prices (b)

2005                    121.7           94.8           27.0
2006                    134.4           99.6           34.8
2007                    149.8          105.0           44.8
2008                    150.6          105.5           45.1
2009                    140.4           94.8           45.6
2010                    137.2           95.8           41.4
2011                    137.7           94.3           43.4
2012                    143.6           94.0           49.6
2013                    152.5           96.9           55.6
2014                    162.6          100.6           61.9
2015                    170.9          104.3           66.5

Percentage changes

2005/2004                 6.3            7.3
2006/2005                10.4            5.1
2007/2006                11.5            5.4
2008/2007                 0.5            0.5
2009/2008                -6.8          -10.2
2010/2009                -2.3            1.1
2011/2010                 0.4           -1.6
2012/2011                 4.3           -0.3
2013/2012                 6.2            3.0
2014/2013                 6.6            3.9
2015/2014                 5.1            3.7

                         Export           World          Terms
                          price         trade (d)     of trade (e)
                     competitiveness
                           (c)

                                         2006=100

2005                       97.9            92.4          100.1
2006                      100.0           100.0          100.0
2007                      104.1           107.2          101.4
2008                      101.2           109.9          101.4
2009                       95.1            97.7          100.5
2010                       96.8           107.8          100.6
2011                      100.0           114.4           98.6
2012                       97.5           120.6           97.4
2013                       97.2           127.6           97.9
2014                       97.1           134.4           98.0
2015                       97.0           140.5           97.8

Percentage changes

2005/2004                  -2.1             7.7           -2.6
2006/2005                   2.1             8.2           -0.1
2007/2006                   4.1             7.2            1.4
2008/2007                  -2.7             2.6            0.0
2009/2008                  -6.1           -11.1           -0.9
2010/2009                   1.9            10.3            0.0
2011/2010                   3.2             6.2           -2.0
2012/2011                  -2.5             5.4           -1.2
2013/2012                  -0.3             5.8            0.5
2014/2013                  -0.1             5.3            0.1
2015/2014                  -0.1             4.5           -0.1

                      Current
                      balance

                      % of GDP

2005                    -2.6
2006                    -3.4
2007                    -2.6
2008                    -1.6
2009                    -1.7
2010                    -2.5
2011                    -2.3
2012                    -1.1
2013                    -0.1
2014                     0.6
2015                     0.9

Percentage changes

2005/2004
2006/2005
2007/2006
2008/2007
2009/2008
2010/2009
2011/2010
2012/2011
2013/2012
2014/2013
2015/2014

Notes: (a) Includes Missing Trader Intra-Community Fraud. (b) Balance
of payments basis. (c) A rise denotes a loss in UK competitiveness.
(d) Weighted by import shares in UK export markets. (e) Ratio of
average value of exports to imports.

Table A5. Household income and expenditure

             Average (a)      Compen-         Total          Gross
               earnings      sation of       personal      disposable
                             employees        income         income

             2006=100        [pounds sterling] billion, current prices

2005             95.7          677.5          1081.1          817.6
2006            100.0          713.0          1133.0          853.1
2007            105.0          752.2          1179.8          881.5
2008            106.6          769.2          1230.3          919.5
2009            109.3          774.0          1241.4          942.2
2010            112.7          796.1          1278.7          974.9
2011            115.5          811.9          1318.5         1004.7
2012            118.8          841.6          1370.5         1041.2
2013            122.2          878.7          1429.6         1083.0
2014            125.9          918.4          1498.1         1131.1
2015            129.7          956.1          1570.2         1183.3

Percentage changes

2005/2004         3.6            4.8             5.3            4.5
2006/2005         4.5            5.2             4.8            4.3
2007/2006         5.0            5.5             4.1            3.3
2008/2007         1.5            2.3             4.3            4.3
2009/2008         2.5            0.6             0.9            2.5
2010/2009         3.2            2.9             3.0            3.5
2011/2010         2.S            2.0             3.1            3.1
2012/2011         2.9            3.7             3.9            3.6
2013/2012         2.8            4.4             4.3            4.0
2014/2013         3.0            4.5             4.8            4.4
2015/2014         3.0            4.1             4.8            4.6

                 Real           Final consumption
              disposable           expenditure
              income (b)       Total         Durable

              [pounds sterling] billion, 2006 prices

2005            839.3          836.6           85.8
2006            853.1          852.0           91.7
2007            856.6          870.8           97.9
2008            866.3          874.5          100.8
2009            876.4          846.9           99.9
2010            869.6          851.6          102.9
2011            858.3          846.3          101.1
2012            872.7          851.0          102.4
2013            893.5          865.1          104.8
2014            915.9          883.1          107.2
2015            939.4          903.6          109.6

Percentage changes

2005/2004         2.0            2.2            6.3
2006/2005         1.6            1.8            6.9
2007/2006         0.4            2.2            6.7
2008/2007         1.1            0.4            3.0
2009/2008         1.2           -3.2           -0.9
2010/2009         0.8            0.6            2.9
2011/2010                       -0.6           -1.7
2012/2011         1.7            0.6            1.3
2013/2012         2.4            1.7            2.4
2014/2013         2.5            2.1            2.3
2015/2014         2.6            2.3            2.2

                Saving         House           Net
              ratio (c)      prices (d)      worth to
                                              income
                                            ratio (e)
               per cent       2006=100

2005             3.9            94.1           6.6
2006             3.5           100.0           7.0
2007             2.6           110.9           7.1
2008             2.0           109.9           6.0
2009             6.0           101.3           6.5
2010             5.4           108.7           6.7
2011             5.2           108.5           6.6
2012             6.3           107.4           6.4
2013             7.0           107.0           6.4
2014             7.5           107.7           6.3
2015             7.7           109.4           6.3

Percentage changes

2005/2004                        5.5
2006/2005                        6.3
2007/2006                       10.9
2008/2007                       -0.9
2009/2008                       -7.8
2010/2009                        7.3
2011/2010                       -0.3
2012/2011                       -1.0
2013/2012                       -0.4
2014/2013                        0.6
2015/2014                        1.6

Notes: (a) Average earnings equals total labour compensation divided
by the number of employees. (b) Deflated by consumers' expenditure
deflator. (c) Includes adjustment for change in net equity of
households in pension funds. (d) Department for Communities and Local
Government, mix-adjusted. (e) Net worth is defined as housing wealth
plus net financial assets.

Table A6. Fixed investment and capital

[pounds sterling] billion, 2006 prices

                             Gross fixed investment (a)

               Business       Private        General         Total
              investment    housing (b)     government

2005            122.1           67.2           23.7          213.6
2006            127.9           73.9           25.4          227.2
2007            144.0           74.1           27.0          245.1
2008            142.4           56.7           33.6          232.8
2009            115.5           41.5           40.0          197.0
2010            118.6           43.8           40.6          203.0
2011            126.2           44.3           35.8          206.3
2012            131.9           46.7           32.2          210.8
2013            138.0           50.3           30.4          218.7
2014            145.0           55.3           30.0          230.3
2015            151.7           60.2           30.7          242.6

Percentage changes

2005/2004         4.5           -4.8           10.9            2.4
2006/2005         4.8           10.0            7.3            6.4
2007/2006        12.5            0.2            6.4            7.8
2008/2007        -1.1          -23.4           24.5           -5.0
2009/2008       -18.9          -26.9           18.9          -15.4
2010/2009         2.6            5.5            1.6            3.0
2011/2010         6.4            1.2          -12.0            1.6
2012/2011         4.5            5.5           -9.9            2.2
2013/2012         4.6            7.8           -5.6            3.8
2014/2013         if             9.8           -1.4            13
2015/2014         4.6            9.0            2.4            5.4

                 User        Corporate
                 cost          profit            Capital stock
                  of          share of
             capital (%)      GDP (%)        Private       Public (c)

2005             17.1           24.2          2163.9         554.1
2006             16.6           25.0          2219.2         564.1
2007             16.5           25.2          2301.2         577.1
2008             16.1           26.2          2370.7         593.2
2009             14.7           25.0          2401.3         612.2
2010             14.2           23.9          2414.4         632.8
2011             16.3           25.3          2432.0         648.0
2012             16.9           25.8          2454.5         659.2
2013             16.9           26.0          2483.7         668.2
2014             16.7           26.3          2521.5         676.5
2015             16.8           26.7          2567.4         685.3

Percentage changes

2005/2004                                        2.4           1.9
2006/2005                                        2.6           1.8
2007/2006                                        3.7           2.3
2008/2007                                        3.0           2.8
2009/2008                                        1.3           3.2
2010/2009                                        0.5           3.4
2011/2010                                        0.7           2.4
2012/2011                                        0.9           1.7
2013/2012                                        1.2           1.4
2014/2013                                        1.5           1.2
2015/2014                                        1.8           1.3

Notes: (a) Fixed investment figures exclude be effect of the transfer
of BFNL nuclear reactors to central government in 2005Q2. (b) Includes
private sector transfer costs A non-produced assets. (c) Including
public sector non-financial corporations.

Table A7. Productivity and the labour market

Thousands

                     Employment                ILO           Labour
              Employees      Total (a)     unemployment     force(e)

2005            24929          28775           1466          30241
2006            25096          29027           1672          30699
2007            25209          29225           1653          30878
2008            25408          29441           1781          31221
2009            24939          28978           2394          31372
2010            24862          29043           2476          31519
2011            24737          28937           2726          31664
2012            24930          29154           2661          31814
2013            25312          29568           2411          31980
2014            25684          29974           2171          32146
2015            25950          30275           2036          32311

Percentage changes

2005/2004        1.2            I.0            2.9            1.1
2006/2005        0.7            0.9            14.1           1.5
2007/2006        0.5            0.7            -1.2           0.6
2008/2007        0.8            0.7            7.7            1.1
2009/2008        -.8            -1.6           34.5           0.5
2010/2009        -0.3           0.2            3.4            0.5
2011/2010        -0.5           -0.4           10.1           0.5
2012/2011        0.8            0.7            2.4            0.5
2013/2012        1.5            1.4            -9.4           0.5
2014/2013        1.5            1.4           -10.0           0.5
2015/2014        1.0            1.0            -6.2           0.5

              Population    Productivity     Manufac-
                  of         (2006=100)       uring
               working        Per hour
                 age

2005            37419           97.7           95.4
2006            37708          100.0          100.0
2007            37916          102.0          102.6
2008            38090          101.4          102.4
2009            38236           99.5           98.4
2010            38395          100.4          106.2
2011            38711          101.4          112.8
2012            38935          102.4          118.5
2013            39169          103.2          123.6
2014            39406          104.3          128.1
2015            39638          105.7          132.1

Percentage changes

2005/2004        0.9            1.1            4.6
2006/2005        0.8            2.4            4.9
2007/2006        0.6            1.9            2.6
2008/2007        0.5            -0.5           -0.3
2009/2008        0.4            -1.9           -3.8
2010/2009        0.4            0.8            7.9
2011/2010        0.8            1.1            6.2
2012/2011        0.6            1.0            5.0
2013/2012        0.6            0.8            4.3
2014/2013        0.6            1.1            3.7
2015/2014        0.6            1.4            3.1

                  Unemployment, %
               Claimant      ILO unem-
                 rate         ployment
                                rate

2005             2.7            4.8
2006             3.0            5.4
2007             2.7            5.4
2008             2.8            5.7
2009             4.7            7.6
2010             4.6            7.9
2011             4.9            8.6
2012             4.6            8.4
2013             3.9            7.5
2014             3.2            6.8
2015             2.8            6.3

Percentage changes

2005/2004
2006/2005
2007/2006
2008/2007
2009/2008
2010/2009
2011/2010
2012/2011
2013/2012
2014/2013
2015/2014

Notes: (a) Includes self-employed, government-supported trainees and
unpaid family members. (b) Employment plus ILO unemployment.

Table A8. Public sector financial balance and borrowing requirement

[pounds sterling] billion, fiscal years

                                                  2008-9      2009-10

Current receipts:    Taxes on income                355.2      338.2
                     Taxes on expenditure           167.6      169.3
                     Other current receipts          11.3       11.1
                     Total                          534.1      518.6
                     (as a% of GDP)                  37.3       36.9

Current expenditure: Goods and services             319.0      329.9
                     Net social benefits paid       172.1      188.3
                     Debt interest                   31.6       31.3
                     Other current expenditure       43.2       52.4
                     Total                          565.9      601.9
                     (as a % of GDP)                 39.5       42.9

Depreciation                                         18.7       19.3

Surplus an public sector current budget (a)         -50.5     -102.6
(as a % of GDP)                                      -3.5       -7.3

Grass investment                                     65.7      -70.1
Net investment                                       47.0       50.8
(as a% of GDP)                                        3.3        3.6

Total managed expenditure                           631.6      672.0
(as a % of GDP)                                      44.1       47.8

Public sector net borowing                           97.5      151.3
(as a% of GDP)                                        6.8       10.9

Financial transactions                             -125.1      -37.0
Public sector net cash requirement                  222.6      190.4
(as a % of GDP)                                      15.6       13.6
Public sector net debt (% of GDP)                    43.3       52.9

GDP deflator at market prices (2006=100)            106.6      108.4
Money GDP                                          1433.4     1404.3

Financial balance under Maastricht                   -4.9      -11.2
  (% of GDP) (b)
Gross debt under Maastricht (% of GDP) (b)           52.1       68.1

                                                  2010-11     2011-12

Current receipts:    Taxes on income               349.5       363.5
                     Taxes on expenditure          191.1       201.5
                     Other current receipts          9.9        14.1
                     Total                         550.5       579.1
                     (as a% of GDP)                 371         37.7

Current expenditure: Goods and services            335.4       342.3
                     Net social benefits paid      196.7       206.6
                     Debt interest                  45.3        51.4
                     Other current expenditure      54.2        51.0
                     Total                         631.6       651.2
                     (as a % of GDP)                43.0        42.5

Depreciation                                        20.5        21.9

Surplus an public sector current budget (a)       -101.6       -94.1
(as a % of GDP)                                     -6.9        -6.1

Grass investment                                    61.3        54.1
Net investment                                      40.9        312
(as a% of GDP)                                       2.8         2.1

Total managed expenditure                          692.9       705.3
(as a % of GDP)                                     47.2        46.0

Public sector net borowing                         142.4       126.3
(as a% of GDP)                                       9.7         8.2

Financial transactions                               0.7        -7.0
Public sector net cash requirement                 141.7       133.3
(as a % of GDP)                                      9.6         8.7
Public sector net debt (% of GDP)                   60.7        67.1

GDP deflator at market prices (2006=100)           111.4       114.8
Money GDP                                         1469.4      1534.0

Financial balance under Maastricht                 -10.3        -8.5
  (% of GDP) (b)
Gross debt under Maastricht (% of GDP) (b)          76.1        80.8

                                                  2012-13     2013-14

Current receipts:    Taxes on income               384.4       404.8
                     Taxes on expenditure          206.4       213.4
                     Other current receipts         14.6        15.3
                     Total                         605.4       633.4
                     (as a% of GDP)                 38.1        38.2

Current expenditure: Goods and services            344.7       349.1
                     Net social benefits paid      211.4       214.5
                     Debt interest                  55.4        58.9
                     Other current expenditure      52.2        53.7
                     Total                         663.7       676.1
                     (as a % of GDP)                41.8        40.8

Depreciation                                        22.9        23.9

Surplus an public sector current budget (a)        -81.3       -66.5
(as a % of GDP)                                     -5.1        -4.0

Grass investment                                    51.0        49.7
Net investment                                      28.1        25.9
(as a% of GDP)                                       1.8         1.6

Total managed expenditure                          714.8       725.9
(as a % of GDP)                                     45.0        43.8

Public sector net borowing                         109.4        92.4
(as a% of GDP)                                       6.9         5.6

Financial transactions                              -8.0       -13.0
Public sector net cash requirement                 117.4       105.4
(as a % of GDP)                                      7.4         6.4
Public sector net debt (% of GDP)                   72.0        75.1

GDP deflator at market prices (2006=100)           116.5       118.6
Money GDP                                         1589.1      1657.7

Financial balance under Maastricht                  -7.2        -5.9
  (% of GDP) (b)
Gross debt under Maastricht (% of GDP) (b)          85.0        87.4

                                                  2014-15     2015-16

Current receipts:    Taxes on income               426.6       449.2
                     Taxes on expenditure          221.0       230.3
                     Other current receipts         15.9        16.6
                     Total                         663.5       696.1
                     (as a% of GDP)                 38.3        38.5

Current expenditure: Goods and services            348.2       352.5
                     Net social benefits paid      222.2       232.9
                     Debt interest                  62.9        67.6
                     Other current expenditure      55.4        57.2
                     Total                         688.8       710.2
                     (as a % of GDP)                39.8        39.3

Depreciation                                        24.9        25.9

Surplus an public sector current budget (a)        -50.1       -39.9
(as a % of GDP)                                     -2.9        -2.2

Grass investment                                    49.7        51.3
Net investment                                      24.9        25.5
(as a% of GDP)                                       1.4         1.4

Total managed expenditure                          738.5       761.5
(as a % of GDP)                                     42.7        42.1

Public sector net borowing                          75.0        65.4
(as a% of GDP)                                       4.3         3.6

Financial transactions                               6.0        -7.0
Public sector net cash requirement                  81.0        72.4
(as a % of GDP)                                      4.7         4.0
Public sector net debt (% of GDP)                   76.6        77.3

GDP deflator at market prices (2006=100)           120.9       123.2
Money GDP                                         1731.0      1807.2

Financial balance under Maastricht                  -4.6        -3.7
  (% of GDP) (b)
Gross debt under Maastricht (% of GDP) (b)          88.2        88.2

Notes: These data are constructed from seasonally adjusted national
accounts data. This results in differences between the figures here
and unadjusted fiscal year data. Data exclude the impact of financial
sector interventions. (a) Public sector current budget surplus is
total current receipts less total current expenditure and
depreciation. (b) Calendar year.

Table A9. Accumulation

As a percentage of GDP

             Households                 Companies
         Saving      Invest-       Saving      Invest-
                       ment                      ment

2005      2.7          5.3          12.8         10.1
2006      2.3          5.6          12.0         10.2
2007      1.7          5.8          14.3         10.8
2008      1.3          4.6          15.0          9.8
2009      4.2          3.4          13.9          7.4
2010      3.7          3.4          15.2          8.9
2011      3.6          3.5          14.3          9.2
2012      4.3          3.6          13.3          9.0
2013      4.8          3.9          12.6          8.9
2014      5.1          4.3          12.2          8.9
2015      5.3          4.7          11.8          8.9

         General government          Whole economy
         Saving      Invest-       Saving      Invest-
                       ment                      ment

2005      -1.1         1.7          14.5         17.1
2006      -0.2         1.7          14.1         17.5
2007      -0.4         1.6          15.6         18.2
2008      -1.3         2.2          15.0         16.7
2009      -6.3         2.6          11.8         13.5
2010      -6.6         2.5          12.4         14.9
2011      -5.4         2.0          12.4         14.7
2012      -4.5         1.7          13.2         14.3
2013      -3.3         1.5          14.1         14.2
2014      -2.2         1.3          15.1         14.5
2015      -1.4         1.3          15.8         14.9

          Finance from abroad       Net
         Total      Net factor    national
                    income (a)     saving

2005      2.6          -1.8         3.4
2006      3.4          -0.7         3.0
2007      2.6          -1.5         4.6
2008      1.6          -2.0         4.6
2009      1.7          -1.5         0.8
2010      2.5          -2.2         1.6
2011      2.3          -1.2         1.7
2012      1.1          -1.0         2.4
2013      0.1          -0.6         3.4
2014      -0.6         -0.5         4.3
2015      -0.9         -0.6         5.0

Note: (a) Negative sign indicates a surplus for the UK.

Table A10. Long-term projections

All figures percentage change unless otherwise stated

                                  2007      2008      2009      2010

GDP (market prices)                 2.7      0.1      -4.9       1.3
Average earnings                    5.0      1.5       2.5       3.2
GDP deflator (market prices)        3.0      3.0       1.4       2.9
Consumer Prices Index               2.3      3.6       2.2       3.3
Per capita GDP                      2.0     -0.7      -5.5       0.7
Whole economy productivity(a)       1.9     -0.5      -1.9       0.8
Labour input(h)                     0.8      0.4      -2.9       0.6
ILO unemployment rate (%)           5.4      5.7       7.6       7.9
Current account (% of GDP)         -2.6     -1.6      -1.7      -2.5
Total managed expenditure
  (% of GDP)                       40.8     42.6      47.7      47.5
Public sector net borrowing
  (% of GDP)                        2.5      4.6      10.8      10.2
Public sector net debt
  (% of GDP)                       36.7     39.0      47.8      56.3
Effective exchange rate
  (2005=100)                      102.9     90.7      81.2      81.0
Bank Rate (%)                       5.5      4.7       0.6       0.5
3 month interest rates (%)          6.0      5.5       1.2       0.7
10 year interest rates (%)          5.0      4.5       3.7       3.6

                                  2011      2012      2013      2014

GDP (market prices)                1.4       2.0       2.3       2.5
Average earnings                   2.5       2.9       2.8       3.0
GDP deflator (market prices)       3.2       1.6       1.8       1.9
Consumer Prices Index              4.5       1.9       1.6       1.9
Per capita GDP                     0.7       1.4       1.7       1.9
Whole economy productivity(a)      1.1       1.0       0.8       1.1
Labour input(h)                    0.2       1.1       1.6       1.5
ILO unemployment rate (%)          8.6       8.4       7.5       6.8
Current account (% of GDP)        -2.3      -1.1      -0.1       0.6
Total managed expenditure
  (% of GDP)                      46.2      45.3      44.1      43.0
Public sector net borrowing
  (% of GDP)                       8.5       7.2       5.9       4.7
Public sector net debt
  (% of GDP)                      63.2      69.1      73.2      75.8
Effective exchange rate
  (2005=100)                      80.6      80.7      81.6      82.3
Bank Rate (%)                      0.7       1.5       2.4       3.1
3 month interest rates (%)         1.0       1.6       2.5       3.2
10 year interest rates (%)         3.7       4.0       4.3       4.5

                                  2015     2016-20

GDP (market prices)                2.4       2.5
Average earnings                   3.0       3.6
GDP deflator (market prices)       1.9       2.0
Consumer Prices Index              2.0       2.0
Per capita GDP                     1.8       1.8
Whole economy productivity(a)      1.4       2.1
Labour input(h)                    1.0       0.3
ILO unemployment rate (%)          6.3       6.1
Current account (% of GDP)         0.9       0.5
Total managed expenditure
  (% of GDP)                      42.2      41.6
Public sector net borrowing
  (% of GDP)                       3.7       2.6
Public sector net debt
  (% of GDP)                      76.9      75.8
Effective exchange rate
  (2005=100)                      83.1      85.2
Bank Rate (%)                      3.5       4.4
3 month interest rates (%)         3.5       4.5
10 year interest rates (%)         4.7       4.9

Notes: (a) Per hour. (b) Total hours worked.

ACKNOWLEDGEMENTS

The forecast was completed using the latest version of the National Institute Global Econometric Model (NiGEM). Thanks to Dawn Holland for helpful comments and suggestions.

The forecast was completed on 27 April 2011.

REFERENCES

Barrell, R. and Dury, K. (2003), 'Asymmetric labour markets in a converging Europe: do differences matter?', National Institute Economic Review, 183, pp. 56-65.

Barrell, R., Gottschalk. S., Kirby, S. and Orazgani, A. (2009), 'Projections of migration inflows under alternative scenarios for the world economy', Department for Communities and Local Government economics paper no. 3.

Barrell, R. and Kirby, S. (2011), 'Trend output and the output gap in the UK', National Institute Economic Review, 215, pp. F63-74.

Bell, D.N.F. and Blanchflower, D. (2010), 'UK unemployment in the Great Recession', National Institute Economic Review, 214, October.

Department for Work and Pensions (2011) A state pension for the 21st century, Cm 8053.

Dow, C. (1998), Major Recessions: Britain and the World, 1920-1995, Oxford University Press.

Haugh, D., Olivaud, P. and Turner, D. (2009), 'The macroeconomic consequences of banking crises in OECD countries', OECD Economics Department Working Paper no. 683, Paris, OECD.

Holland, D., Kirby, S. and Whitworth, R. (2010), 'A comparison of labour market responses to the global downturn', National Institute Economic Review, 211, pp. F38-42.

NOTES

(1) Figure 3 reports the 80, 85 and 90 per cent confidence intervals around our forecast for CPI inflation. The bounds are derived from stochastic simulations using our global econometric model NiGEM.

(2) The main target of the Chancellor's Fiscal Mandate is for the cyclically adjusted current budget to be in balance in five years time (currently 2015-16).

(3) The duty on fuel was reduced by 1 penny per litre rather than increased by the 6 pence per litre that had previously been planned under the fuel escalator, which will be abolished when the Finance Bill 2011 becomes an Act of Parliament. Instead of the escalator a fair fuel stabiliser is currently planned. However, this does not mean that automatic increases in fuel duty have been abolished. Current plans envisage fuel duties continuing to increase in line with RPI inflation. Indeed 3 pence of the increase that had been planned for April 2011 was due to RPI and this has simply been postponed until January 2012. The fair fuel stabiliser increases fuel duties by RPI plus one penny a litre when oil prices are low, but by just RPI when oil prices are high. The Chancellor believes that $75 a barrel represents the point at which prices transition from low to high and vice versa, To pay for this tax cut, the Chancellor has raised the supplementary charge on the oil and gas sector from 20 to 32 per cent. When oil prices fall back, the Chancellor has stated that the charge would gradually be returned to 20 per cent.

(4) In our projections the rise in the oil price since January should generally worsen the prospects for the public finances over the next five years. Model-based analysis suggests that the average effect is around 0.1 per cent of GDP, but will peak at 2.7 billion [pounds sterling], or 0.16 per cent of GDP in 2012-13.

(5) Currently the state pension age is to increase to 66 over the period 2024-6. This is factored into our forecast.

Table 1. Summary of the forecast

Percentage change

                                2007     2008     2009     2010

GDP                              2.7     -0.1     -4.9      1.3
Per capita GDP                   2.0     -0.7     -5.5      0.7

CPI Inflation                    2.3      3.6      2.2      3.3
RPIX Inflation                   3.2      4.3      2.0      4.8

RPDI                             0.4      1.1      1.2     -0.8

Unemployment, %                  5.4      5.7      7.6      7.9
Bank Rate, %                     5.5      4.7      0.6      0.5
Long Rates, %                    5.0      4.5      3.7      3.6
Effective exchange rate          2.1    -11.9    -10.5     -0.2

Current account as % of GDP     -2.6     -1.6     -1.7     -2.5

PSNB as % of GDP (a)             2.3      6.8     10.9      9.7
PSND as % of GDP (a)            36.4     43.3     52.9     60.7

                                2011     2012     2013     2014

GDP                              1.4      2.0      2.3      2.5
Per capita GDP                   0.7      1.4      1.7      1.9

CPI Inflation                    4.5      1.9      1.6      1.9
RPIX Inflation                   5.3      2.3      2.1      2.4

RPDI                            -1.3      1.7      2.4      2.5

Unemployment, %                  8.6      8.4      7.5      6.8
Bank Rate, %                     0.7      1.5      2.4      3.1
Long Rates, %                    3.7      4.0      4.3      4.5
Effective exchange rate         -0.6      0.2      1.0      0.9

Current account as % of GDP     -2.3     -1.1     -0.1      0.6

PSNB as % of GDP (a)             8.2      6.9      5.6      4.3
PSND as % of GDP (a)            67.1     72.0     75.1     76.6

                                2015

GDP                              2.4
Per capita GDP                   1.8

CPI Inflation                    2.0
RPIX Inflation                   2.5

RPDI                             2.6

Unemployment, %                  6.3
Bank Rate, %                     3.5
Long Rates, %                    4.7
Effective exchange rate          0.9

Current account as % of GDP      0.9

PSNB as % of GDP (a)             3.6
PSND as % of GDP (a)            77.3

Notes: RPDI is real personal disposable income. PSNB is public sector
net borrowing, PSND is public sector net debt.

(a) Fiscal year, excludes the impact of financial sector
interventions.