Ahead of the Budget on Monday (October 29), we briefly examine how the economy and public finances are performing.
What’s the current economic situation?
Economic growth recovered over the summer following a below-par start to the year. Severe winter weather had resulted in lower construction sector output and weaker retail sales, while the hot summer weather was a factor in the growth rebound.
The underlying economic performance is less positive – annual GDP growth rates of between 1% and 1.5% remain below those of recent years, and lower than in many other large advanced economies.
Consumer spending growth has slowed
Recent economic growth mostly reflects the subdued performance of consumer spending, traditionally the main driver of UK economic activity. The squeeze in household budgets following last year’s rise in inflation, principally due to the fall in the pound after the EU referendum, continues to dampen the spending outlook.
Investment remains flat
Other parts of the economy are not providing much support to growth, with investment stalling and export growth slowing sharply in 2018 after a robust performance in 2017.
Wage growth could boost household incomes
Tentative signs of accelerating wage growth in recent months, combined with forecasts of lower inflation heading into 2019, could boost household incomes. The labour market remains strong with the unemployment rate at a 40+ year low and the proportion of the working-age population in work near record highs.
Uncertainty over Brexit negotiations still an issue
The outlook is marked by uncertainty over Brexit negotiations. Most economic forecasts, including those of the Office for Budget Responsibility (OBR), are premised on a withdrawal deal between the UK and EU being agreed. This would result in a transition period after Brexit, whereby the UK remains in the EU single market and customs union. Should the UK leave the EU without a deal, economic conditions may be very different, with the OBR warning that a disorderly Brexit “could have a severe short-term impact” on the economy.
What’s going on in public finances?
Government borrowing – the difference between public spending and income raised from taxes and other sources – is at a relatively normal level, having decreased from the peaks reached following the financial crisis. At 1.9% of GDP, borrowing in 2017/18 was below the average for the past 70 years. The OBR expects borrowing to fall further over the next five years, largely from government controls over day-to-day public spending.
Borrowing over the first half of 2018/19 has been lower than expected which may lead the OBR to lower its underlying borrowing forecast. If the OBR believes that some of the improvement in borrowing is permanent, and not due to temporary factors, it will also lower its forecast for future years.
Government debt remains high
While the situation for government borrowing looks positive, government debt – broadly speaking, the stock of past borrowing – remains high at 85% of GDP. The debt-to-GDP ratio was last above 85% in the mid-to-late 1960s, when it was still recovering from reaching over 200% of GDP during World War II. The OBR has forecast gradual falls in the debt-to-GDP ratio over the coming years, but by 2022/23 it expects the debt-to-GDP ratio to still be not far under 80%.
The OBR’s forecasts assume that Brexit negotiations lead to an orderly transition to a new long-term relationship with the EU. A less orderly outcome will likely have a negative impact on the public finances.
Where can I get more information?
The Library’s Autumn Budget 2018: Background briefing discusses the economic situation and public finances in more detail. It also covers areas such as public spending, developments since the 2018 Spring Statement and other issues, such as Universal Credit.
The Library will publish a Budget edition of its summary of UK Economic Indicators on 24 October and a summary of the Budget on the evening of 29 October.
Look out for more Budget related Insights on this site next week, and subscribe to email alerts if you want them delivered straight to your inbox.
Matt Keep is a statistical researcher and Daniel Harari is a Senior Library Clerk specialising in UK and international economies at the House of Commons Library.