Ahead of the Spring Statement on Wednesday (13 March) we examine how the economy and public finances are performing.

What’s the current economic situation?

GDP growth of 1.4% in 2018 was the slowest since 2012, with growth easing towards the end of the year. Two key factors behind this slowdown were a weaker global economy and uncertainty related to Brexit.

GDP quarterly growth was: 0.1% in Q1 2018, 0.4% in Q2 2018, 0.6% in Q3 2018 and 0.2% in Q4 2018

The world economy has been characterised by the Chinese economy growing less quickly, trade tensions (particularly between the US and China), and a sharply slowing Eurozone economy.

In Q4 2018 year on year GDP growth was 3.1% in the US. It was 1.3% in the UK and 1.2% in the Eurozone

Domestically, Brexit-related uncertainty has been blamed for falling business investment as the UK approaches its scheduled date for leaving the EU on March 29. Consumer spending has underpinned growth recently, supported by a historically-high proportion of the population in employment and average wage growth starting to pick-up.

Consumer spending growth has been around 2% (on previous years) since mid-2017

The outlook for 2019 is dominated by Brexit and on what terms the UK leaves the EU. Under an assumption of an ‘orderly’ or ‘smooth’ departure from the EU, GDP growth of around 1-1½% for 2019 is generally forecast by economists. For most economists, a smooth departure includes a negotiated withdrawal and two-year transition period.

In October 2018, the OBR forecast economic growth of between 1.4% and 1.6% until 2023.

Should the UK leave the EU without a deal, disruption is expected to lead to weaker growth. The Bank of England Governor Mark Carney has said he “guarantee[s]” the Bank’s GDP forecasts would be lowered in such a scenario. The OBR has previously warned that there could be severe short-term implications of a no-deal Brexit, although the scale is hard to predict.

What’s going on in public finances?

Government borrowing has decreased from the peaks reached following the 2007-2008 financial crisis, and is now at a more typical level. The Government borrowed £42 billion in 2017/18 to make up the difference between its spending and income raised from taxes and other sources. At 2% of GDP, this was below the average for the past 70 years.

Government spending was equivalent to 45% of GDP in 2009/10 and government revenues were equivalent to 35%. The gap between these has closed and in 2017/18 government spending was equal to 38% of GDP and government revenues were equal to 36% of GDP.
Public sector borrowing has fallen from 10% of GDP in 2009/10 to 2% in 2017/18

While the Government’s borrowing situation has improved, its debt – broadly speaking the stock of past borrowing – remains high. Public sector net debt at the end of 2017/18 was equal to 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.

Public sector net debt has increased from around 34-35% of GDP prior to the financial crisis to 85% in 2017/18

Where can I get more information?

The Library’s Spring Statement 2019: Background briefing discusses the economic situation and public finances in more detail.

About the author: Matt Keep is a Senior Library Clerk specialising in the public finances and Daniel Harari is a Senior Library Clerk specialising in UK and international economies at the House of Commons Library.

Image: Daffodils in St James’s Park / Tom Page / CC by-SA 2.0