The chancellor bides his time as the UK remains in the slow lane of global growth, writes John Hawksworth (PwC).
UK economic growth has slowed over the past couple of years, but the latest news has been somewhat more positive on the back of a stronger global economy. The Office for Budget Responsibility (OBR) nudged up its 2018 GDP growth forecast from 1.4% to 1.5% to reflect this better international outlook.
Looking further ahead, however, the OBR has not made any material changes to its growth projections, sticking to the downward revisions to productivity growth it made in its November forecasts. As a result, average UK growth is still expected to be only 1.4% over the next five years, well below its long-term historical average of just over 2% per annum. The OBR expects the UK to remain in the slow lane of global growth for some years to come.
The OBR has also kept its inflation projections largely unchanged, still expecting this to fall from around 3% now back down to its 2% target rate over the next year. This will allow real wage growth to edge back into positive territory later this year, though it will remain modest by historical standards.
The OBR also revised down its public borrowing estimate for 2017/18 from around £50bn to only around £45bn given better than expected public finance data so far this year. This downward revision was a bit less than expected, however, largely because the OBR is doubtful that hard-pressed local authorities will underspend their budgets by as much as the Office for National Statistics (ONS) is assuming.
This relatively modest public borrowing undershoot is expected to persist into future years, with borrowing in 2020/21 now expected to be around £4bn less than in November. This improvement, however, is judged by the OBR to be largely cyclical, rather than reflecting an underlying structural improvement in the public finances.
Relative to the chancellor’s target of getting the structural budget deficit below 2% of GDP in 2020/21, the comfort margin has therefore remained largely unchanged since November at just over £15bn. At around 0.7% of GDP, this is well within the margin of error for any borrowing forecasts looking three years ahead, so there is no room for complacency about hitting this target.
In these circumstances, it was not surprising that the chancellor chose to bide his time for now, with no significant tax or spending changes in the Spring Statement. However, with increasing strains being evident on public services such as the NHS and social care, the chancellor will be under considerable political pressure to ease off on austerity in his Autumn Budget.
The chancellor remains concerned, however, that the public debt to GDP ratio is still uncomfortably high at around 85% of GDP. He argued again in his Spring Statement that this needs to be brought down over the next five years to put the public finances in better shape to cope with any future economic shocks. This is in line with George Osborne’s old dictum of ‘fixing the roof while the sun is shining’.
There is certainly some merit in this view, particularly at a time when the outcome of the Brexit negotiations remains uncertain. By November, however, some of these uncertainties will hopefully have been resolved and, if the economy has continued to perform reasonably well, the chancellor may feel able to direct some extra resources to priority areas. But we would not expect a major shift in the stance on fiscal policy in the autumn.
Comparison of key OBR forecasts in March 2018 and November 2017
The chancellor bides his time as the UK remains in the slow lane of global growth, writes John Hawksworth (PwC).
UK economic growth has slowed over the past couple of years, but the latest news has been somewhat more positive on the back of a stronger global economy. The Office for Budget Responsibility (OBR) nudged up its 2018 GDP growth forecast from 1.4% to 1.5% to reflect this better international outlook.
Looking further ahead, however, the OBR has not made any material changes to its growth projections, sticking to the downward revisions to productivity growth it made in its November forecasts. As a result, average UK growth is still expected to be only 1.4% over the next five years, well below its long-term historical average of just over 2% per annum. The OBR expects the UK to remain in the slow lane of global growth for some years to come.
The OBR has also kept its inflation projections largely unchanged, still expecting this to fall from around 3% now back down to its 2% target rate over the next year. This will allow real wage growth to edge back into positive territory later this year, though it will remain modest by historical standards.
The OBR also revised down its public borrowing estimate for 2017/18 from around £50bn to only around £45bn given better than expected public finance data so far this year. This downward revision was a bit less than expected, however, largely because the OBR is doubtful that hard-pressed local authorities will underspend their budgets by as much as the Office for National Statistics (ONS) is assuming.
This relatively modest public borrowing undershoot is expected to persist into future years, with borrowing in 2020/21 now expected to be around £4bn less than in November. This improvement, however, is judged by the OBR to be largely cyclical, rather than reflecting an underlying structural improvement in the public finances.
Relative to the chancellor’s target of getting the structural budget deficit below 2% of GDP in 2020/21, the comfort margin has therefore remained largely unchanged since November at just over £15bn. At around 0.7% of GDP, this is well within the margin of error for any borrowing forecasts looking three years ahead, so there is no room for complacency about hitting this target.
In these circumstances, it was not surprising that the chancellor chose to bide his time for now, with no significant tax or spending changes in the Spring Statement. However, with increasing strains being evident on public services such as the NHS and social care, the chancellor will be under considerable political pressure to ease off on austerity in his Autumn Budget.
The chancellor remains concerned, however, that the public debt to GDP ratio is still uncomfortably high at around 85% of GDP. He argued again in his Spring Statement that this needs to be brought down over the next five years to put the public finances in better shape to cope with any future economic shocks. This is in line with George Osborne’s old dictum of ‘fixing the roof while the sun is shining’.
There is certainly some merit in this view, particularly at a time when the outcome of the Brexit negotiations remains uncertain. By November, however, some of these uncertainties will hopefully have been resolved and, if the economy has continued to perform reasonably well, the chancellor may feel able to direct some extra resources to priority areas. But we would not expect a major shift in the stance on fiscal policy in the autumn.
Comparison of key OBR forecasts in March 2018 and November 2017
