Economic Indicators, Budget Update

Budget

On Wednesday 22 November, the Chancellor will present the Budget to the House of Commons. How are the economy and public finances performing? For more information see the Library briefing Autumn Budget 2017: Background briefing.

What’s the economic situation?

Growth

Economic growth has been stable but modest so far in 2017 on the back of a slowdown in consumer spending. Latest quarterly GDP growth of 0.4% in the third quarter (Q3 2017) was similar to the 0.3% recorded in Q1 and Q2.

However, GDP growth has been slowing. GDP growth stood at 1.5% in Q3 2017 compared with a year before. This contrasts with many other advanced economies, particularly the Eurozone, which has seen growth accelerate in 2017.

The Office for Budget Responsibility (OBR) – the producers of the official forecasts – has said that it intends to lower its productivity forecasts at Autumn Budget 2017, presumably resulting in it lowering its GDP growth forecasts.

Prices and wages

Consumers have been squeezed by rising inflation following past falls in the value of the pound, notably following the June 2016 EU referendum. Inflation is currently at 3.0%, while average wage growth adjusted for inflation was 0.6% lower than a year before.

Wage growth remains weak despite unemployment being at its lowest rate since 1975 and near-record employment rates.

Interest rates

With inflation well above its 2% target, the Bank of England raised interest rates from 0.25% to 0.5% in early November. This was the first rate increase since 2007. The decision to raise rates was also partly a result of the Bank lowering its expectations of the economy’s potential growth rate, itself a consequence of lower productivity growth forecasts.

What’s going on in the public finances?

Borrowing and debt

In 2016/17 the government borrowed £46 billion to make up the difference between its spending and income raised from taxes and other sources. Borrowing, often referred to as the deficit, is now at a similar level to before the 2007-2008 financial crisis.

In March 2017, the OBR forecast that the government will borrow more in 2017/18 than in 2016/17. This is still expected to be the case, despite an improvement in the borrowing data for the first half of 2017/18. The OBR forecast that borrowing will decrease in subsequent years up to the end of their forecast in 2021/22.

At 86% 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 it to fall to around 80% of GDP by the end of this Parliament.

Developments since March 2017

A series of developments since March 2017 may impact on the OBR’s borrowing forecasts:

• The OBR anticipates “significantly reducing” their assumption for potential productivity growth, which will lower economic growth forecasts and increase borrowing.
• The Office for National Statistics (ONS) is moving English housing associations back to the private sector. Their borrowing – about £3 billion in 2016/17 – will no longer impact on the deficit.
• There appears to have been an underlying improvement in the public finances. The Institute for Fiscal Studies (IFS) – an economic think tank – estimate that the improvement could lower borrowing by around £11 billion per year.
• Since March 2017 the Government has introduced new policies and dropped some previously announced policies, which will effect spending and revenues.
• The Bank of England’s decision to raise interest rates in November will directly impact on the Government’s spending on debt interest.