The key chart
Historic and forecast trends in sectoral balances for the UK private and public sectors and the RoW expressed as % GDP (Source: OBR; CMMP)
The key message
Viewed from a sectoral balances perspective, the Office of Budget Responsibility’s (OBR’s) latest “Economic and Fiscal Outlook” for the UK appears “too dull to be true”.
Too dull to be true?
Sectoral balances illustrate the financial relationship between different economic sectors. Between the UK private sector (households and corporates), the UK public sector and the rest-of-the-world (RoW), for example, in the key chart above.
The approach builds on the key accounting identity pioneered by the late Wynne Godley that states that:
Domestic private balance + domestic public balance + foreign balance (must) = zero
Pre-COVID, the UK was characterised by unsustainable macro imbalances. Both domestic sectors were running net borrowing (or deficit) positions at the same time. This left the UK increasingly reliant on net lending from the rest-of-the world – the ultimate irony for “post-Brexit Britain”.
The pandemic changed everything. The private sector shifted to unprecedented levels of net lending/surpluses. At its peak in 2Q20, private sector surpluses/disinvestment totalled almost 25% GDP. Fortunately, the UK government’s response was timely, rapid and appropriate with an offsetting deficit/investment of 25% GDP (see key chart above).
Recent (post-pandemic) OBR outlooks forecast a return to the pre-COVID world of unsustainable macro imbalances. The latest version is more optimistic, thanks in part to improved household dynamics.
In short, the OBR forecasts a balanced UK private sector – a net lending position for the household sector of 1.3% GDP in 1Q29 down from 2.6% GDP in 2Q23, but close to average levels, and a return to investment or net borrowing by UK corporates equivalent to -0.9% GDP. The OBR also expects net borrowing by the government to fall from -7.3% GDP to only -0.7% GDP over the same period.
The OBR concludes that, “Following large swings during the pandemic and energy crisis, sectoral balances are expected to return to historically more normal levels over the forecast period.”
A more cynical observer may conclude that the forecasts are simply too dull and/or too smooth to be true…
Please note that the summary comments and chart above are abstracts from more detailed analysis that is available separately.