What does the current economic picture mean for the Budget?

October 25, 2018

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by Mike Jakeman Senior Economist

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After a sluggish start to 2018, the UK economy picked up during the Summer, thanks to the warm weather and the World Cup. However, I think economic growth will slow again in the Autumn and Winter, as a lack of clarity on Brexit will prevent more and more businesses from committing to new investments. The rate of economic growth has a direct effect on the level of tax revenue the Treasury receives, and therefore the amount the Chancellor, Philip Hammond, has to spend in the Budget.

So far this financial year, tax revenue has been slightly stronger than what was expected by the Office for Budget Responsibility (OBR), the government’s fiscal watchdog. And government departments have also spent less than the OBR projected. If these trends continue, the government will have borrowed £7 billion less than it thought it would in the financial year as a whole. In my view this is good news, as it means the government will be less indebted and it will have slightly more money to spend. However, it has already committed this money and more through recent policy announcements. The prime minister, Theresa May, said several months ago that the government would spend an additional £20 billion on the NHS by 2023. She also told the Conservative Party conference that the government would freeze fuel duty for a ninth consecutive year. The government is also coming under pressure to relax spending limits on a range of public services, including police, prisons and benefits.

I think that Mr Hammond faces a difficult balancing act in this Budget. He is coming under heavy pressure to increase spending, but he would be unable to afford this without significant tax rises that his government would struggle to pass in parliament. He is also likely to want to keep some money in reserve in case the economy needs a boost after Brexit. Given all of these factors, I expect Mr Hammond to allow the government to borrow slightly more money over the next few years, while keeping the government roughly on track to meet his target of a budget deficit below 2% of GDP by 2020/21.

I don’t expect businesses to feel any major differences after this Budget: public spending will still be tightly controlled and the government will remain under pressure to provide more money for public services and investment. My advice is to check back on pwc.co.uk/budget on October 29th to see our sector-specific analysis of how changes to economic projections and tax legislation will affect your business.

 

by Mike Jakeman Senior Economist

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