November was a busy month of economic policy announcements with the Government unveiling its Budget and industrial strategy, and the Bank of England raising interest rates. Economic data confirmed modest GDP growth of 0.4% in the third quarter, while, despite low unemployment, average wages continued to rise by less than the rate of inflation.
Budget presented alongside weaker growth forecasts
The Chancellor presented his Budget on 22 November against the backdrop of the Office for Budget Responsibility (OBR), the official watchdog of the public finances, presenting a gloomier economic outlook. The OBR lowered its economic growth forecasts in every year and more noticeably from 2019 onwards.
This stemmed mainly from a significant downgrade of its assessment of the economy’s potential to be more productive. UK productivity has persistently underperformed previous OBR forecasts, having barely increased in recent years compared to its historical average of around 2% per year. The OBR thus decided that “the recent weakness will indeed prove more enduring” and lowered its productivity growth forecasts by 0.6 percentage points to 1.1% per year on average starting from 2018.
The knock-on effect of the lower economic growth forecasts was that the OBR increased its forecast for public sector borrowing in the later years of its five-year forecast period (2019/20 onwards). Better-than-expected tax revenues and lower-than-expected government spending led to the OBR lowering its forecast for borrowing in 2017/18, while its forecast for 2018/19 was broadly similar to its March 2017 forecast.
Policy measures in the Budget included scrapping stamp duty on homes under £300,000 for first-time buyers; an increase in planned spending on the NHS; an extra £3 billion over 2018/19 and 2019/20 for Brexit preparations; and a package of measures and funding intended to boost house building. Total government spending will be higher, especially in 2019/20, than was previously announced. This does not, however, alter the overall trend in planned public spending: day-to-day public spending is due to be 3.6% lower in 2022/23 than today, according to analysis from the Institute for Fiscal Studies (IFS).
Further information on the Budget and the OBR forecasts is available from the Library’s briefing Autumn Budget 2017: A summary.
Government’s Industrial Strategy seeks to boost economic prospects
Less than a week after the Budget, the Government published its industrial strategy White Paper Building a Britain fit for the future. This set out the “foundations” of economic policy it would target in order to tackle the “grand challenges” – such as advancement of Artificial Intelligence (AI), green technology and an ageing society – it identifies as being crucial for future economic prospects.
These key policy areas targeted by the Industrial Strategy – the “five foundations” – are:
- Ideas (R&D, innovation)
- People (skills and education)
- Infrastructure (broadband, energy, transport)
- Business environment (support for specific sectors and SMEs)
- Places (tackling regional disparities)
Partnerships between the government and certain sectors were also announced in life sciences, construction, AI and the automotive industry. The intention is for the number of these “sector deals” to increase. Further detail and reaction is available in the Library briefing Industrial strategy.
Bank of England raises interest rates
Shortly after our previous monthly update on the economy, the Bank of England’s Monetary Policy Committee (MPC) raised interest rates for the first time since 2007. The decision on 2 November increased the benchmark base rate from 0.25% to 0.5%. This had been expected following statements from MPC members in previous weeks.
Looking ahead, the MPC has suggested further modest rate rises are likely, with a figure of two more 0.25%-point increases by 2020 being cited. However, financial markets are less convinced with some suggesting that the recent rise would be a one-off. For more on the interest rate rise and its impact on households, see the Library blog post Why have interest rates been raised? And what’s the impact?
Other economic developments
The preliminary estimate of quarterly GDP growth of 0.4% in the third quarter was confirmed in the most recent GDP data release. Providing most of the impetus was an acceleration in consumer spending growth from 0.2% in the previous quarter to 0.6%.
Labour market data for the three months to September showed that the unemployment rate (4.3%) was the lowest it has been since 1975. Average total pay increased by 2.2%, compared to CPI inflation of 2.8% over the same period. The latest inflation rate, for October, is 3.0%. Most economists expect the inflation rate to ease somewhat in 2018. Whether average wage growth accelerates from its current subdued pace to rise above inflation will likely play an important role in determining economic prospects in 2018.
This article was originally published in the December edition of the Library’s Economic Indicators paper. The monthly publication provides a snapshot of key economic data covering: growth, labour market, finance, borrowing, trade, exchange rates, business, retail and housing. Individual pages are updated through the month as new data come out.