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Spring Budget 2017: Economics view

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The Brexit vote has not yet had a major negative effect on UK economic growth, but there are still many uncertainties ahead. So it was not surprising that the chancellor chose to deliver a ‘safety first’ Budget, in which giveaways on social care, vocational education and business rates relief were broadly offset by tax rises for the self-employed and other measures.
The Office for Budget Responsibility (OBR) revised up its 2017 GDP growth forecast from 1.4% to 2% and revised down its public borrowing estimate for 2016/17 from around £68bn to only around £52bn (see table below).
However, both the OBR and the chancellor were keen to stress that this large short term borrowing downgrade was mostly due to one-off factors that had little impact on the medium term outlook for the public finances. Indeed, some of the borrowing was just shunted into 2017/18 due to timing effects, with the result that the deficit is actually projected to rise slightly next year to £58bn (or £55bn if you exclude the extra money for social care, business rates relief and other net giveaways in 2017/18).
On a medium term view, extra economic growth in 2017 will be offset by slightly slower average growth over the following three years, so the OBR’s estimate of the overall level of GDP in 2021 is more or less unchanged from what it projected in November. The same is true of the budget deficit, which is still projected to be around £17bn in 2021/22, the last year of the forecast period.
In summary, the OBR does not expect the recent relatively good news about the economy and the public finances to last. In particular, it expects higher inflation linked to the weak pound to cause a marked deceleration in real consumer spending growth from around 3% in 2016 to just 1.8% in 2017 and only around 1% in 2018. The OBR expects some offset from stronger net exports due to a more competitive currency, but not enough to stop overall UK GDP growth moderating to below trend rates of around 1.6–1.7% in 2018 and 2019. This would, however, be only a modest slowdown, not a recession.
The chancellor did find around £3bn extra for social care and the NHS over the next three years and a total of around £0.5bn of business rate relief spread over the next four years, with both of these giveaways being front-loaded in 2017/18. There was also a welcome injection of cash to support enhanced technical education for 16 to 19 year olds, which is an area where the UK has long lagged behind countries like Germany.
Once you get beyond the next year, though, these giveaways were offset by increases in national insurance contribution rates for the self-employed and a reduced tax-free allowance for dividends. So the medium term net impact of the Budget measures was close to zero, although the tax increases for the self-employed have proved politically contentious.
The chancellor will be hoping that the uncertainty surrounding Brexit will not dampen growth in 2018/19 as much as the OBR forecasts, in which case the public finances could improve faster than projected. If this happens, the chancellor may be able to afford either tax cuts or spending rises later in the Parliament. Or he might achieve his longer term aim of a balanced budget sooner than expected. But it is far from guaranteed that the Brexit negotiation process will go smoothly, so the chancellor was prudent to adopt a relatively cautious approach for now. 
Issue: 1345
Categories: Analysis