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Spring Statement 2019: economics view

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The chancellor’s Spring Statement was overshadowed politically by the Brexit votes that sandwiched it, but struck an upbeat tone on future prospects provided a deal can be done to allow an orderly Brexit.

Much of the focus was on the new Office for Budget Responsibility (OBR) economic and public finance forecasts (see table). UK growth picked up last summer, but has slowed since then due in particular to the drag on business investment and exports from Brexit-related uncertainty and slower global growth. The OBR revised down its 2019 GDP growth forecast from 1.6% to 1.2% to reflect these recent trends.

Looking further ahead, however, the OBR has not made any material changes to its medium term growth projections since October. As a result, average UK growth is still expected to be around 1.5% over the next five years, with slightly higher projected growth in 2021/22 offsetting the downward revision for 2019. The OBR still expects UK growth to be below its historical average rate of around 2%, but the outlook is not that bad provided that there is a reasonably orderly Brexit with a transition period.

The OBR has also kept its projections for inflation largely unchanged, still expecting this to remain close to its 2% target rate over the next five years. This will allow real wage growth to remain in positive territory, helping to support consumer spending growth.

The OBR revised down its public borrowing estimate for 2018/19 from around £26bn in October to around £23bn now due to stronger than expected tax revenue growth in recent months.

More importantly, this public borrowing undershoot is expected to persist in future years, with borrowing in 2020/21 and later years now expected to be around £6bn lower than forecast in October. This partly reflects a view that the recent buoyancy of tax revenues will continue, and partly a downward revision in future debt interest costs due to somewhat lower market estimates of future gilt yields.

Relative to the chancellor’s target of getting the structural budget deficit below 2% of GDP in 2020/21, the comfort margin has therefore risen from around £15bn last October to around £26bn in these new forecasts, although there is no room for complacency about hitting this target given uncertainty around Brexit.

The OBR also notes that forthcoming changes in the way that student loans are accounted for in the public finances could add around £12bn to the measured deficit in 2020/21. This could wipe out almost half of the chancellor’s room for manoeuvre unless he also revises up his deficit target to reflect this accounting change.

Given these factors, and particularly the fog of uncertainty around Brexit, it was not surprising that the chancellor chose to bide his time for now. Only very modest public spending increases were announced in the Spring Statement (amounting to around £2bn in 2023/24, which is less than 0.1% of GDP).

However, if an orderly Brexit can be achieved over the next few months, the chancellor signalled that he should be able to afford some additional expenditure in his planned three-year spending review this autumn, in addition to the extra money for the NHS announced last year.

Of course, there is no guarantee at present that the Brexit negotiations will lead to an orderly exit from the EU. Both the OBR and the chancellor warned of the serious downside risks that a disorderly Brexit could pose to the economy and the public finances. We will all have to keep our fingers crossed that this outcome can be avoided.

Comparison of key OBR forecasts in March 2019 and October 2018

Real GDP growth (%) 2018 2019 2020 2021 2022 2023
Spring Statement (March 2019) 1.4 1.2 1.4 1.6 1.6 1.6
Budget (Oct 2018) 1.3 1.6 1.4 1.4 1.5 1.6
CPI inflation (%)       
Spring Statement (March 2019) 2.5 2.1 1.9 2.0 2.0 2.0
Budget (Oct 2018) 2.6 2.0 2.0 2.1 2.1 2.0
Public sector net borrowing
2018/19 2019/20 2020/21 2021/22 2022/23 2023/24
Spring Statement (March 2019) 23 29 21 18 14 14
Budget (Oct 2018) 26 32 27 24 21 20

*Excluding borrowing of public sector banks.

Source: OBR