The Spring Statement is next Tuesday. What is the spring statement? How are the economy and public finances performing?
What is the spring statement?
In the main, the spring statement gives the Chancellor the opportunity to respond to the Office for Budget Responsibility’s latest forecasts for the economy and public finances. It is unlikely that the statement will feature any new spending or tax announcements: the Chancellor has said that the statement will be ‘no major fiscal event’.
The Chancellor may launch consultations to address wider challenges for the economy and public finances.
What’s the economic situation?
The UK economy grew by 1.7% in 2017, slightly slower than in 2016. This relatively modest growth reflected subdued growth in consumer spending.
Consumers faced higher inflation, a result of past falls in the pound which raised import prices, and lacklustre earnings growth. Stronger export performance has mitigated this to some extent, supported by the lower value of the pound and a resurgent world economy. Much of the world has seen accelerating economic growth of late, including the US and Eurozone.
With UK inflation at 3%, well above its 2% target, the Bank of England’s Monetary Policy Committee (MPC) lifted interest rates – from 0.25% to 0.5% – in early November. The MPC has signalled that it is likely to raise interest rates further, possibly in May.
Employment rates remain at near-record highs (around 75% of the working-age population is in work) and the unemployment rate is very low by historical standards at 4.4%.
The backdrop of a stronger global economy has led some forecasters – including the Bank of England – to raise slightly their expectations of UK GDP growth for 2018. Most expect it to be somewhere between 1.5-2.0% again this year. If the Office for Budget Responsibility (OBR) follows suit, it may revise up its current forecasts of GDP growth of 1.4% in 2018 and 1.3% in 2019.
What’s going on in the public finances?
Borrowing and debt
In 2016/17, UK government borrowed £46 billion to make up the difference between its spending and income raised from taxes and other sources. Since its 2009/10 peak the UK’s borrowing – often referred to as the deficit – has fallen by 70%. Borrowing is now at a similar level to before the 2007-2008 financial crisis.
It is very likely that the OBR will lower its estimate for borrowing in 2017/18. Outturn data for the year so far has been better than expected, and the OBR says “it now looks clear that borrowing in 2017-18 will undershoot our November forecast by a significant margin”.
If some of the improvement in borrowing is thought to be permanent, it may feed through to the OBR’s borrowing forecast for future years. In November 2017, the OBR forecast that government borrowing will fall in each year after 2017/18 before reaching £26 billion, or 1.1% of GDP, in 2022/23.
At 86% of GDP, public sector net debt – largely the stock of borrowing arising from past deficits – remains relatively high by recent standards. In November 2017, the OBR forecast that the debt-to-GDP ratio will fall to just over 79% of GDP by 2022/23.
Government’s public finance targets
In its forecast the OBR will assess the Government’s progress against its targets for borrowing and debt. In its previous forecast, the OBR judged that the Government was on course to meet both targets.
The OBR will also assess progress against the Government’s overall objective for the public finances, which is for the Government’s budget to be in balance – spending no more than its income – sometime in the 2020s. There is some ambiguity about the exact date for achieving this target, but the OBR says that, whatever the date, the objective appears challenging.
The Treasury Committee recommends that the Government clears up the ambiguity in some of its targets for the public finances at Spring Statement 2018.
Where can I get more information?
The Library’s Spring Statement 2018: Background briefing discusses the economic situation and public finances in more detail.
The Library has published a spring statement edition of its summary of UK Economic Indicators.
The Library will publish a summary of Spring Statement 2018 on the evening of 13 March.
Look out for spring statement related ‘Insights’ on Second Reading.