The Spring Budget is this Wednesday. How are the economy and public finances performing? And what might we expect to hear from the Chancellor?
What’s the economic situation?
Growth in the UK economy during the second half of 2016 continued unaffected by the EU referendum result. In 2016 as a whole, GDP growth was 1.8%.
Consumers’ appetite to spend – the bedrock of recent economic growth – will be tested by the increase in inflation currently underway, which is anticipated to continue. This is mostly the result of the fall in the pound since the EU referendum, causing import prices to rise.
Rising inflation is forecast to reach around 3% later this year, which will eat into consumers’ purchasing power. This is the main reason GDP growth is forecast to slow to 1.4% in both 2017 and 2018 (based on the latest average forecast of economists).
Without unexpectedly higher income growth, an acceleration in household borrowing and/or reductions in savings rates, overall economic growth will need to come from elsewhere to prevent a sharper slowdown. It is unlikely to come from investment, which is forecast to remain weak, and government spending is not likely to provide any meaningful boost to GDP. Instead, the hope – and expectation – is that the fall in the pound will boost the performance of UK exporters, thereby contributing to growth in 2017 and 2018.
In 2015/16 the government had to borrow £72 billion to make up the difference between its spending and its income from taxes and other revenues. Since its 2009/10 peak the UK’s borrowing, often referred to as the deficit, has halved. Despite the improvement, borrowing remains above the levels seen before the 2007-2008 financial crisis. The Office for Budget Responsibility – the UK’s fiscal watchdog – forecast in November that borrowing will fall to £22 billion by the end of this Parliament.
At over 80% of GDP, public sector net debt – largely the stock of borrowing arising from past deficits – remains relatively high by recent and international standards. The OBR forecast that the debt-to-GDP ratio will begin falling between 2017/18 and 2018/19.
So what might we see in the Budget?
Business rates revaluation
The next revaluation of the business rates paid on commercial properties will come into effect on 1 April 2017. The revaluation will see some businesses pay more rates and some pay less. However, many businesses and sectors have stated that the increases they face will have a damaging effect on their finances. The Government is expected to announce further support to those businesses facing the steepest increases on Wednesday.
The tax-free personal allowance and higher rate threshold
The Government is committed to raising the income tax-free allowance to £12,500 by the end of this Parliament. It is also committed to raising the point at which people start paying the higher rate of tax to £50,000. The Chancellor may choose to announce increases over the coming years to take the allowance and threshold closer to the pledged levels.
NHS and adult social care spending pressures
Both the NHS and adult social care face significant financial challenges. Costs are rising, the population is growing and ageing, and needs are becoming more complex.
Although health spending has been protected relative to other public services, there are concerns that increasing demand and costs threaten the financial stability and sustainability of the NHS.
Adult social care hasn’t received similar spending protection, and local government – who fund social care – have seen their funding reduced. The Government has taken some action to address the funding pressures. Some stakeholders have questioned whether the action taken is sufficient.
School spending pressures
Concerns about the spending pressures faced by schools have been intensified by the planned introduction of a National Funding Formula in England. As with any change of this type there are expected to be winners and losers. Even after taking Government steps to limit the impact into account, some schools will face reductions in cash funding per pupil towards the end of this Parliament.
A significant number of previously announced changes to welfare will come into effect in April 2017. Later today we will blog on the changes.
This summary was originally published in the Library’s Spring Budget background briefing.
The Library will publish a summary of Spring Budget on the evening of 8 March.