Budget Overview

This year there will be two Budgets. The one unveiled this week, and another much later this year, replacing the previous Autumn Statement. That is one reason why this was a relatively low key Budget. In economic and fiscal terms there was very little change. Even though the Office for Budget Responsibility (OBR) was forced to revise up their near-term economic forecast - as they were too pessimistic about the economy post Brexit - they have become more cautious further out. Thus the economy is expected to grow 2% this year (revised up from a previous forecast of 1.4%), slow to 1.6% in 2018, 1.7% in 2019, 1.9% in 2020 and 2% in 2021. So in essence the OBR is not allowing the Chancellor to factor in a Brexit dividend into his fiscal numbers. Also the Treasury clearly is not yet seeing Brexit as an opportunity but remains worried about the uncertainty associated with it. In turn, the Chancellor announced a fiscally neutral Budget, with net higher taxes in the next two years being offset by a net giveaway in the following three.

Thankfully there was little tinkering - there being only 22 policy changes being announced in this Budget compared with 78 in the previous Autumn Statement, and in sharp contrast to much of the short-term tactical changes that characterised policy under the previous two Chancellors. A key aspect of fiscal policy is to both create an enabling environment and to put the right incentives in place, and thus one of a number of aspects of the political focus following the Budget has been on the increase in national insurance contributions for self-employed which is expected to raise £145 million and, to a lesser extent, on the change to dividend payments, which reportedly impacts one in twenty pensioners. While the Chancellor presented the case for both changes in his speech a wider question is whether this is sending the right signal - particularly as the Chancellor rightly described entrepreneurs and innovators as the life blood of the economy.

From a macro-economic perspective, this Budget should be viewed as "work in progress". The approach to Brexit has to be seen alongside the Government's domestic economic agenda. This Budget gave us further insight into the latter - and shows that there is still much to be done.

This Budget supplemented December's Autumn Statement that outlined a new £23 billion infrastructure fund, aimed at boosting areas such as housing and transport. The full impact of that will feed through in coming years. While good, considerably more still needs to be done. Indeed in this Budget housing was not mentioned in the speech, but the figures in the independent report from the OBR that underpins the Budget assumes house prices will rise by 4.8% on average per year over the forecast horizon. A rate of increase that would mean house prices double in only fifteen years. With the ratio of high prices to earnings already high, while rental rates are also eating into a huge amount of disposable income, it suggests that much amount still needs to be done to increase the supply of affordable properties. To support the Autumn Statement focus on infrastructure, this Budget had a sensible focus on technical education and boosting skills. This was supported by some welcome measures on science and universities. While all this is good, the scale needs to be increased.

The economy still is heavily imbalanced, as we have outlined before. In particular, the budget deficit still remains high, even though it is falling and despite it being nine years since the 2008 financial crisis. The budget deficit has been revised down by £16.4 billion to £51.7 billion for this year 2016/17, and is expected to rise temporarily next year before heading lower. The consequence of this still high deficit is that the Chancellor sought to achieve balance by using his better the expected fiscal numbers since the Autumn, to focus on reducing the deficit, allocating some more money for investment and retaining "fiscal flexibility", as he called it, for the future. While that can be seen as understandable, it does reflect another challenge. And that is the tax take is far too high. It is set to reach 36.7% of national income in 2017/18 according to the official forecasts, and to rise further, reaching 37.2% in 2021/22, at the end of the forecast period. These ratios are widely seen as being at the high end of where tax rates can reach.

Another area that attracts attention is the low level of UK savings. The savings ratio was only 0.6% in the third quarter of last year, and is likely to now negative. As yet this is not a major policy concern, even though household debt is now rising, levels are below their financial crisis peak and it is often overlooked that household assets too are also high.

Even though there has been a focus on cutting corporation tax, raising personal and higher allowances and limiting excise duties, it highlights that a large focus of reducing the deficit has been on raising the tax take. It raises the question as to whether the economy can grow more strongly to reduce the deficit, or whether it is possible for government spending to be brought more under control?

The current state of the economy has to raise questions as to whether a major rethink is needed in terms of overall macro-economic policy in the UK, including monetary policy. Particularly if the UK is to start to reduce imbalances, address social issues and position the economy to compete globally and benefit fully from Brexit. Indeed, the worry is that we are perhaps not being ambitious enough. Given the momentous decision to leave the EU - which could be seen as being on a par with 1931, 1945 and 1979 in economic significance - one would expect that by the time of this year's autumn Budget there will be an even greater focused on ensuring the UK is internationally competitive and positioned for the future.

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