A Budget Roundup

Work in progress and still some way to go – that was my immediate take on the Budget. The good news was that the Chancellor recognised the need to position the UK for the great opportunities and significant challenges ahead. Despite this, far more needs to be done.

First, the Chancellor and The Treasury are failing to fully embrace the opportunities Brexit could bring. Philip Hammond began his speech by mentioning there were opportunities from Brexit. But then he failed to spell them out. He and The Treasury still convey the image of making the best of a bad job. I would like to have heard far more about the vision that lies ahead. Admittedly the Chancellor is putting an extra £3 billion aside to prepare for Brexit. This should have been done sooner and is on top of £700 million already spent.

Second, the independent Office for Budget and Responsibility (OBR) who provide the economic forecasts, now believe the UK is a low-growth economy. This is not because of Brexit but because of low productivity growth since the 2008 financial crisis. They are catching up with the Bank of England who have been cutting their forecast steadily over much of the last decade. This year the economy looks set to grow by 1.5%, which is lower than expected back in the spring but far higher than most forecast immediately after last year's referendum. The economy is expected to grow only 1.4% next year and 1.3% in 2019.

Economic Forecasts (Annual % Increase)

2016 2017 2018 2019
Growth 1.8 1.5 (2.0) 1.4 (1.6) 1.3 (1.7)
Household Consumption 2.8 (3.0) 1.5 (1.8) 0.8 (0.9) 1.2 (1.7)
Fixed Investment 1.3 (0.4) 2.6 (0.8) 2.1 (3.0) 2.0 (3.3)
Net Trade -0.9 (-0.4) 0.4 (0.3) 0.2 (0.3) 0.0 (0.0)
CPI Inflation 0.7 2.7 (2.4) 2.4 (2.4) 1.9 (2.0)

Source: Budget Red Book Autumn 2017, forecasts of the independent OBR. Figures in brackets from Spring 2017 Budget

The trouble is that the OBR may be becoming too pessimistic at just the wrong time. Inflation is forecast to peak this quarter and fall next year. That should help consumer spending, particularly if wage growth picks up, as seems likely. Also, with the world economy growing more strongly, UK exports should grow too, helped by the competitive pound. Much will also depend on businesses and whether they will invest over the next year or so.

Third, the Budget confirmed that the Conservatives have abandoned austerity as the way to reduce the budget deficit. The Chancellor announced a large £25 billion boost over the remainder of this and the next five fiscal years. The bulk of that is increased spending. So instead of cutting taxes further, or getting rid of the deficit sooner, the government has opted to boost spending. The Budget included 69 new spending or tax measures, which suggests far too much micro-managing.

Fourth, we also need an enabling environment for businesses to grow. On that front there was some good news for small firms, including a welcome cut in business rates. I was critical of previous austerity measures, arguing that the government should be borrowing more to invest. This has started to happen in recent years and we saw more of this, which is welcome.

Fifth, housing was the centrepiece of the Budget. The good news was the Chancellor stressed that this was about building more homes, including easing planning restrictions. In that respect the measures he announced were welcome, but maybe more speed is needed as we will have to wait until the middle of the next decade to achieve 300,000 extra homes per year. Stamp duty is a bad way to tax housing, as it discourages turnover, but surely cutting stamp duty for first-time buyers will just force up the seller’s price. More supply is needed, soon.

UK Housing Starts by Fiscal Year

Source: HM Land Registry data (C) Crown copyright and database right 2017. This data is licensed under the Open Government Licence v3.0

Sixth, the economy faces long-term challenges. It is only when productivity is higher that wages can start to rise. In my view, low productivity is explained by the four ‘I’s: investment, innovation, infrastructure and inclusive growth. We need more of each of these. The Budget announced some measures. On the innovation front, the Chancellor was right to help the UK take a lead role in the new technology revolution. On inclusive growth, the good news was more help promised to the regions and cities outside of London, and a much needed £1.5 billion to ensure better delivery of universal credit. Helping more people back to work is key. Raising personal tax allowances further was also a welcome measure. Now we need wages to rise.

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