Budget will hold no big surprises on spending or tax, chancellor says
Philip Hammond has played down the significance of the spring budget and denied he plans to surprise parliament with big spending plans or tax reforms.
This was always going to be a “just in case” budget, only bursting into life should the public finances need rescuing from a further slowdown in the economy. But the economy is performing strongly, even as it slows, leaving the chancellor to continue where he left off in the autumn statement: focusing on relatively limited measures to improve the UK’s infrastructure, skills and education.
Austerity will continue to drive down government spending to levels not seen since before the financial crisis, while the tax burden is on track to reach its highest level as a proportion of GDP in 30 years.
What does that mean for the public finances and the choices the chancellor has before him?
The economic outlook
Growth The Office for Budget Responsibility (OBR) – the Treasury’s independent forecaster – is expected to take an optimistic view of the short-term growth prospects, possibly raising the target from 1.4% this year to nearer the Bank of England’s 2% forecast. This could prove controversial. Critics say the recovery from the Brexit vote is built on consumer spending, which is about to face a squeeze from slowing wages growth and higher inflation. The OBR may also be forced to downgrade last year’s growth from its own estimate of 2% to the Office for National Statistics’ 1.8%. In March last year the OBR forecast 2017 growth at 2.2%.
Wages How much the OBR expects wages to slow will be crucial. Average annual pay slipped in the final three months of 2016 from 2.7% to 2.6%, according to the latest figures. The most recent report for the Bank of England showed that average wage rises could slip from 2.7% down to 2.1% by the end of the year. Slowing wages growth would rob the economy of its main engine.
Inflation Until now the OBR has said it expects this year’s inflation rate to be no more than 2.3% and then to peak at 2.5% in 2018. However, these forecasts are now among the lowest around and are likely to be revised upwards amid strongly rising food and petrol prices – probably to 2.6% this year.
Business investment The OBR has always believed business investment will return to pre-crisis norms, whatever the evidence. It has mostly been wrong. But it is unlikely to drop its optimistic forecasts at such a delicate political moment, ahead of the article 50 negotiations, and risk accusations from Brexit campaigners that it is supping with the remain camp. It was forecast in November to remain negative this year, but pick up dramatically for the rest of the decade.
Trade The lower pound means exports are likely to pick up and imports to decline. The OBR in November was considered by some to be conservative in forecasting a 0.3% increase in net trade this year. The new estimate could be higher.
The public finances
Deficit Viewed from the economic depths in November last year, the forecast for this year’s government’s budget deficit will look rosy. The spending shortfall could be as much as £12bn less than previously feared, reducing the forecast budget deficit for 2016-17 from £68bn to about £56bn. This would offset upward revisions to borrowing over the next five years that the OBR said followed the decision to leave the European Union. Extrapolated over the next four years, it could put up to £40bn more in the chancellor’s pocket than he expected in November. The Resolution Foundation has pencilled in a conservative £29bn.
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