Chancellor bides his time as the UK remains in the slow lane of global growth

March 16, 2018

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By John Hawksworth

UK economic growth has slowed over the past couple of years, but the latest news has been somewhat more positive on the back of a stronger global economy. The Office for Budget Responsibility (OBR) nudged up its 2018 GDP growth forecast from 1.4% to 1.5% to reflect this better international outlook, which is in line with our own latest growth projection for this year.

Looking further ahead, however, the OBR has not made any material changes to its growth projections, sticking to the downward revisions to productivity growth it made in its November forecasts. As a result, average UK growth is still expected to be only 1.4% over the next five years, well below its long-term historical average of just over 2% per annum.

The OBR therefore expects the UK to remain in the slow lane of global growth for some years to come. They are slightly more pessimistic here than we or most other forecasters including the Bank of England are about medium term UK growth prospects, although there is some merit in taking a relatively cautious approach to economic forecasting when it comes to financial planning, whether for the government or a business. This is particularly true given ongoing uncertainties around Brexit.

The OBR has also kept its inflation projections largely unchanged, still expecting this to fall from around 3% now back down to its 2% target rate over the next year. This will allow real wage growth to edge back into positive territory later this year, though it will remain modest by historical standards.

Comparison of key OBR forecasts in March 2018 and November 2017

Real GDP growth (%)

2017

2018

2019

2020

2021

2022

Spring Statement (March 2018)

1.7

1.5

1.3

1.3

1.4

1.5

Budget (Nov 2017)

1.5

1.4

1.3

1.3

1.5

1.6

CPI inflation (%)

           

Spring Statement (March 2018)

2.7

2.4

1.8

1.9

2.0

2.0

Budget (Nov 2017)

2.7

2.4

1.9

2.0

2.0

2.0

Public sector net borrowing

(£ billion)*

2017/18

2018/19

2019/20

2020/21

2021/22

2022/23

Spring Statement (March 2018)

45

37

34

29

26

21

Budget (Nov 2017)

50

40

35

33

30

26

*Excluding borrowing of public sector banks.

Source: OBR

The OBR also revised down its public borrowing estimate for 2017/18 from around £50 billion to only around £45 billion given better than expected public finance data so far this year. This downward revision was a bit less than expected, however, largely because the OBR is doubtful that hard-pressed local authorities will underspend their budgets by as much as the ONS is assuming.

This relatively modest public borrowing undershoot is expected to persist into future years, with borrowing in 2020/21 now expected to be around £4 billion less than in November. This improvement, however, is judged by the OBR to be largely cyclical rather than reflecting an underlying structural improvement in the public finances.

Relative to the Chancellor’s target of getting the structural budget deficit below 2% of GDP in 2020/21, the comfort margin has therefore remained largely unchanged since November at around £15 billion. At around 0.7% of GDP, this is well within the margin of error for any borrowing forecasts looking three years ahead, so there is no room for complacency about hitting this target.

What can we expect from the Autumn Budget?

In these circumstances, it was not surprising that the Chancellor chose to bide his time for now, with no new tax or spending changes being announced in the Spring Statement. However, with increasing strains being evident on public services such as the NHS and social care, the Chancellor will be under considerable political pressure to ease off on austerity in his Autumn Budget.

The Chancellor remains concerned, however, that the public debt to GDP ratio is still uncomfortably high at around 85% of GDP and he argued again in his Spring Statement that this needs to be brought down over the next five years to put the public finances in better shape to cope with any future economic shocks. This is in line with George Osborne’s old dictum of ‘fixing the roof while the sun is shining’.

The Chancellor will also be mindful of the longer term fiscal challenges posed by an ageing population, which will push up public spending on health, social care and state pensions significantly in the 2020s and beyond.

There is certainly some merit in these arguments, particularly at a time when the outcome of the Brexit negotiations remains uncertain. By November, however, some of these uncertainties will hopefully have been resolved and, if the economy has continued to perform reasonably well, the Chancellor may feel able to direct some extra resources to priority areas like the NHS, social care, housing and schools. There may also be some carefully targeted tax cuts, as well as some longer term tax reform proposals. But we would not expect a major shift in the stance of fiscal policy in the Autumn and a full-scale Spending Review has been deferred until 2019.

 

This is an edited version of an article written for the Tax Journal, which can be found on their website here.

John Hawksworth:
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