Economic and fiscal outlook – October 2021

The latest update of our forecasts was published on the 27 October 2021 in the October 2021 Economic and fiscal outlook. Read the overview or the Executive summary.

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Economic and fiscal outlook - October 2021

October 27, 2021 – 2.60 MB

Chapter 2 sets out our forecasts for the economy over a five year horizon. We cover our assumptions regarding the coronavirus pandemic, set out our latest forecast and the effect of policies in the Budget and Spending Review 2021.

Chapter 3 sets out our forecasts for receipts and public spending over a five year horizon. We also explain our loans and other financial transactions forecasts. All this, together with new policy decisions, builds the outlook for borrowing and debt.

In Chapter 4, we assess the Government against its fiscal targets and present the significant uncertainty around our forecast. We examine whether the Government has a better than 50 per cent chance of meeting them on current policy.

Annex A covers the policy decisions since March and Annex B sets out the major balance sheet interventions during the financial crisis and pandemic.

At a glance

GDP Growth in 2021
CPI in 2021 Q2
Borrowing

Supporting documents

Supplementary documents

Information or data which has been released as a result of external requests, since the original publication of the main document.

Presentations

Boxes

Within each of our key publications we include topical ‘boxes’. These self-contained analyses are unique to this publication and tend to cover recent developments in the economy or public finances that complement the main discussion of our analyses.

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our October 2021 Economic and fiscal outlook, we adjusted our economy forecast to take into account plans to loosen fiscal policy from 2022-23, as well as for several specific measures, including the impact of the HSC Levy on earnings.

Economy categories: Inflation, Labour market

Cross-cutting categories: Fiscal multipliers, Forecast process

The behavioural legacy of the pandemic

Chart 2.A: The impact on se ctors from the behavioural legacy of the pandemic
Covid-19 caused dramatic changes in people's behaviour, which affected where, what and how much economic activity took place. In this box we examined the changes which appeared likely to outlast the pandemic, and the progress the economy had made in adjusting to them.

Economy categories: Productivity, Household consumption, House prices

Cross-cutting categories: Coronavirus

Blue Book 2021 revisions and other post-forecast developments

Chart 2.B: Real GDP revisions: over pandemic and annual since 1998
As we closed our pre-measures forecast earlier than usual at October Budget 2021, our forecast did not include the Quarterly National Accounts released on 30 September 2021, which contained Blue Book 2021 consistent revisions. This box examined the potential implications that including the latest data may have had on our forecast. We judged that the data revisions and other developments since we closed our forecast would have largely offset one another, leaving our economic forecast broadly unchanged.

Economy categories: Nominal GDP, Economic data revisions, Real GDP

Cross-cutting categories: Data revisions, Blue Book

The economic effects of supply bottlenecks

Chart 2.D: Shifting demand and bottlenecks to supply are impacting prices
In October 2021 commentators became increasingly concerned that the inability of supply to keep up with demand in specific areas of the economy would hold back the recovery. In this box we examined these 'supply bottlenecks' in energy, product and labour markets, discussing their consequences for wage and price inflation.

Economy categories: Oil prices, Employment and unemployment, Inflation, Average earnings, Household consumption

The initial impact of Brexit on UK trade with the EU

Chart 2.E: EU and non-EU goods trade
On 1 January 2021 some, but not all, of the provisions of the Trade and Cooperation Agreement came into effect following the UK's departure from the EU. In this box we looked at the initial impact of the new regime on UK trade patterns. We also considered whether the data was consistent with our assumption that Brexit will eventually reduce UK imports and exports by 15 per cent.

Economy categories: Net trade

Cross-cutting categories: Brexit and the EU

The economic effects of higher and more persistent inflation

Chart 2.G: CPI inflation and Bank Rate: central forecast versus alternative scenarios
Inflation risks intensified after we closed our pre-measures forecast for the October 2021 Budget. This box showed two stylised scenarios embodying higher and more persistent inflation than in our central forecast to highlight the uncertainty surrounding the outlook. In one scenario inflation was driven mainly by pressures in the product market, and the other mainly pressures in the labour market, which had different implications for wages and consumption.

Economy categories: Labour market, Inflation

Cross-cutting categories: Uncertainty

Repairing the public finances: the pandemic versus the financial crisis

Chart 3.A: Discretionary fiscal tightening: the pandemic versus the financial crisis
The pandemic generated only modest structural damage to the fiscal position but did still create a gap in what the Chancellor considered a sustainable fiscal position. This box compared the scale of fiscal consolidation facing the chancellor and his approach to repairing the public finances with the challenge that faced Chancellor George Osborne after the financial crisis.

Fiscal categories: Public sector net borrowing, Structural deficit, Public spending, Receipts

Cross-cutting categories: Financial interventions, Coronavirus, Financial sector

Higher inflation: effects on our central forecast and alternative scenarios

Chart 3.B: Public sector net borrowing effects of our alternative inflation scenarios
The level and nature of inflation has consequences for the public finances. This box explored the fiscal consequences of the sharp rise in inflation since our March 2021 forecast and examined the fiscal effects of the two scenarios described in Box 2.6 in our October 2021 EFO one where inflation is driven mainly by pressures in the product market, and the other mainly pressures in the labour market. The box concluded the labour market inflation scenario was significantly more beneficial for the public finances.

Economy categories: Inflation

Fiscal categories: Public spending, Receipts

Climate-related measures in the Budget and Spending Review

Chart 3.C: Climate change scenarios: impact on public sector net debt in 2050-51
Our 2021 Fiscal risks report explored the fiscal risks posed by climate change and the Government’s commitment to reduce the UK’s net carbon emissions to zero by 2050. This box examined the policies announced in the Budget, Spending Review, and Net Zero Strategy in October 2021, and the significant rises in market prices for hydrocarbons since we completed our Fiscal risks report, and how they had changed the risks associated with climate change and decarbonisation.

Fiscal categories: Vehicle excise duties, Business rates, Fuel duty, Public spending

Cross-cutting categories: Climate change

The impact of post-forecast developments on fiscal target headrooms

Our pre-measures fiscal forecast was closed earlier than usual to give the Chancellor a stable base to make decisions for the Budget and Spending Review. This box described the impact of news since the forecast closed on headroom to the Government's fiscal targets.

Cross-cutting categories: Forecast process

Using stochastic simulations to produce fan charts

Chart 4.C: 10,000 simulations of current balance and change in PSND in 2024-25
We illustrate the uncertainty around our forecasts using a variety of approaches. This box described using stochastic simulations to produce fan charts, which could be used to enhance presentation of uncertainty in future EFOs, and showed some experimental results.

Fiscal categories: Public sector net debt

Cross-cutting categories: Fan charts, Uncertainty

The long-term cost of the social care cap and floor reform

Chart A: Long-term cost estimate of social care funding reforms as a share of GDP and relative to baseline spending
On 7 September 2021, the government announced a reform to the funding of adult social care in England. In this box, we described how this reform compares with the 2011 Dilnot Commission proposals and the reforms from the Care Act 2014 that were planned for April 2016 and then abandoned.

Fiscal categories: Public spending, Departmental spending

Cross-cutting categories: Ageing population, Demographics