The inaugural spring statement came and went in much the way that the Chancellor promised it would. There were no new spending or taxation announcements and no single official document for the event. A raft of consultations and consultation responses were published and the Chancellor spoke for less than half an hour.
The Chancellor promised and delivered on the statement being ‘no fiscal event’. Those looking for a juicy story to tell may turn to official forecasts published alongside the statement. If they do, they may need to dig deep because the headline measures for the economy and public finances are little changed.
Only small changes to economic forecasts……
The Office for Budget Responsibility (OBR) – the UK’s public finances watchdog – made only very small changes to its GDP growth forecasts compared to its November 2017 projections. It revised up its 2018 growth forecasts from 1.4% to 1.5% on the back of “the unexpected strength of the world economy”. However, while leaving 2019 and 2020 forecasts unchanged, it slightly lowered GDP growth in 2021 and 2022 by 0.1%-points in each year, to 1.4% and 1.5%, respectively.
The big picture is that the OBR sees no reason to alter its outlook on the UK economy, which in November was downgraded sharply. Indeed, the OBR’s estimate of the economy’s sustainable growth rate remains at around 1.5% per year, down from 2% prior to November’s downgrade.
This was mostly a result of lower productivity growth forecasts, reflecting its poor performance since the 2008/09 financial crisis. The OBR believes a recent upturn in quarterly productivity growth is likely the result of erratic movements in hours worked rather than an underlying improvement. It therefore assumes the more upbeat figures will be reversed in early 2018.
In addition, not only does the OBR think that growth is currently around its sustainable rate – “its speed limit” as the Bank of England often calls it – but also that the economy is currently operating slightly above its capacity. In other words, the economy is slightly overheating. Although the economy’s productive capacity can’t be observed directly – meaning estimates of it are necessarily imprecise – it signals the OBR’s belief that there is no slack left in the economy for faster growth to be easily achieved.
All-in-all, the big changes the OBR made to its outlook for the UK economy in November remain little changed today.
…and to government borrowing
With the OBR’s economic forecast largely unchanged, it follows that little has changed in the outlook for borrowing. Borrowing has been revised down in all years of the forecast, but the revisions only bring the forecasts a little closer to the rosier picture painted by the OBR in March 2017.
Borrowing in 2017/18 receives the largest revision, a revision that means that the OBR now expects government borrowing to fall in 2017/18, relative to 2016/17. It was widely expected that the OBR would lower its 2017/18 borrowing forecast following the release of positive provisional outturn data. However, the revision – an improvement of £4.7 billion – was a little smaller than some expected.
Broadly speaking, stronger than expected tax receipts are behind the lower 2017/18 borrowing forecast, with self-assessment income tax, PAYE, and National Insurance contributions performing particularly strongly.
The OBR puts the recent unexpected strength in tax receipts down to temporary factors, which are unlikely to persist in future years of the forecast. Nevertheless, the OBR forecast borrowing to be lower by £3.2 billion a year on average from 2018/19 onwards, largely as a result of increases in its receipts forecast. The OBR expect factors such as stronger earnings growth and higher interest rates to boost receipts relative to its previous forecast.
Later today the Library will publish a summary briefing of Spring Statement 2018.
Picture credit: Daffodils in St James’s Park by Tom Page. Licensed by CC by-SA 2.0.