By Conor Lambe, Chief Economist at Danske Bank
In a change with previous UK fiscal events, there was no Budget in March this year. Instead the Chancellor of the Exchequer delivered his first Spring Statement, providing an update on the economy, the public finances, and launching a number of government consultations. This marks a shift from the previous two fiscal policy announcements per year – the Budget and the Autumn Statement – to a single Budget in the autumn and this shorter update earlier in the year. To accompany the Spring Statement, the Office for Budget Responsibility (OBR) published an updated outlook for the UK economy.
Compared with the previous forecasts, published last November, there was little change in the OBR’s view of the UK’s economic prospects. The forecast for real GDP growth was revised up marginally for 2018 and brought down a little for 2021 and 2022.
But rather than focus too much on small changes to the growth forecasts, the main take away from the OBR’s report for me is the confirmation that we are currently in a low growth environment. The annual average real GDP growth rate expected by the OBR over the period 2018 – 2022 is 1.4 per cent. By way of comparison, average growth from 2003 – 2007 (the five years before the financial crisis) was 2.7 per cent and average growth from 2013 – 2017 (the last five years) was 2.2 per cent. What makes this even more striking is that the OBR believes that the economy is currently growing slightly faster than its potential rate of growth.
With regards to the public finances, the OBR expects government borrowing in the current financial year to be lower than it forecast last November. And both borrowing and public sector debt as a percentage of GDP are projected to fall from 2018-19 to 2022-23. The OBR also thinks that the Government will meet most of its fiscal objectives, but on current expectations, it appears likely that it won’t succeed in balancing the headline budget by the middle of the 2020s.
Diving into the detail within the OBR’s report, there are two things that are worth a mention. The first is around current and forecast productivity trends and the second relates to the UK’s Brexit bill.
In the second half of last year, productivity growth in the UK came in at relatively high rates. Output per hour worked – the preferred way of measuring labour productivity – grew by 0.9 per cent in the third quarter of 2017 and by 0.8 per cent in the fourth quarter. These were the fastest rates of growth since 2011. However, the OBR has refrained from upgrading its productivity growth forecasts in the years ahead on the back of this strong data. Given the UK’s chronic productivity performance over the last decade, it is sensible not to overreact to a few quarters of better than expected data.
Following the phase one Brexit agreement struck by the UK and the EU last December, the OBR has also estimated how much the Brexit bill will end up running to. The final amount to be paid by the UK Government is estimated at just over £37 billion. The vast majority of this is expected to be paid within the next decade, with some small payments then continuing each year until around 2064. In macroeconomic terms, this is relatively small fry. The bigger fiscal repercussions of Brexit will result from the impact that it has on the UK’s overall economic performance in the years ahead.
Within the Chancellor’s statement itself, there were no major policy changes or announcements. However, a number of consultations were announced including on the role of cash and digital payments in the economy and on using the tax system to reduce the use of plastic. The Treasury also announced a consultation on the impact of VAT and Air Passenger Duty on tourism in Northern Ireland.
In truth, there was little to get too excited about in this Spring Statement and it is unlikely to last long in the memory. Government borrowing and public debt are forecast to fall in the years ahead but there are significant public finance challenges still to tackle, such as the impact of Brexit, dealing with the effects of an ageing population and funding public services like health and social care. As expected, none of these were really discussed during the Statement. They are long-term issues that will take time to address and require some difficult decisions to be made. This would not be easy in good economic times. But set against the backdrop of the OBR’s subdued economic growth forecasts, the challenge looks even tougher.
This article was published in the Irish News on 20th March 2018