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Productivity and pay hammer growth outlook in UK budget

Steep cuts to the official forecasts for growth, productivity and wages darkened the U.K.'s economic outlook, as finance minister Philip Hammond found £44 billion of spending for housing and made cosmetic changes to fiscal policy in his Autumn Budget.

The U.K.'s independent Office for Budget Responsibility, or OBR, is now expecting 1.5% GDP growth in 2017, down from a 2% growth forecast in March. The OBR also lowered its forecasts for each of 2018, 2019 and 2020 to well below 2%, while revising its 2021 forecast down from 2% to 1.5%.

The pound rose by just under 0.3% to $1.3272 by 2:26 pm in London.

In his speech, the Chancellor of the Exchequer said an additional £3 billion would be allocated to ensure that the U.K. is prepared for "every possible outcome" of the Brexit negotiations with the EU, in addition to the £700 million already set aside.

The U.K. government is keen to move on to discussions of a future trade deal by December, but it is being held up by the EU's insistence that sufficient progress is made first on priority issues like the Irish border, citizens' rights and the country's ultimate exit bill.

The extra cash for Brexit turned out to be one of the biggest spending decisions in a budget statement short on giveaways, and Berenberg's senior U.K. economist Kallum Pickering was one of those who were unimpressed.

"Hammond has missed a critical opportunity to demonstrate that the UK is committed to tackling its problems," he said.

"Without the policy and imagination to pursue pro-growth policies fast, the UK looks set to suffer the full consequences of Brexit in terms of lower long-run economic growth. Chancellor Hammond’s basket of policies that include, among other things, measures to boost housing, cuts to income tax, and modest hand-outs to raise R&D, fall short of what is needed to improve the UK’s long term prospects."

Hammond highlighted the government's success in limiting the national debt, which is seen peaking at 86.5% of GDP this year, before falling below 80% in 2021.

His headline spending pledge was for housing, which is set to receive £44 billion towards a target of building 300,000 new homes a year by the middle of the next decade, though there was no detail on what proportion of this funding would go to building versus supporting loans for housing projects, for example.

He also announced cosmetic changes to tax policy, raising the tax-free personal allowance on income tax to £11,850 from April 2018, with the higher-rate tax threshold rising to £46,350. The National Living Wage will also rise from £7.50 an hour to £7.83.

While the Chancellor said he was optimistic about the U.K.'s economic future, the OBR's Economic and Fiscal Outlook report, published alongside his statement on Nov. 22, appeared to disagree.

The OBR said the impact of lower productivity meant GDP would grow by 5.7% over the next five years, rather than by the 7.5% it was expecting as recently as March.

This had nothing to do with Brexit, or with the latest economic figures, it said, but rather the "repeated tendency throughout the post-crisis period for productivity growth to disappoint."

Wage growth forecasts were also trimmed, with the OBR now expecting real earnings growth to average just 0.6% a year in the six years to 2022, as nominal wage growth picks up slowly from 2.3% this year to 3.1% by 2022.

Business investment is now expected to rise by around 12% between the first quarter of 2017 and the first quarter of 2022, significantly lower than the 19% expected in March.