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What did the budget mean?

LACK OF VISION: Philip Hammond’s Budget announcement last month failed to touch on a number of issues the country faces

THE RECENT Budget will not live long in the memory or the history books for its vision. It will, however, be remembered for seeing one of the fastest policy reversals of recent Budget tax increases.

Fortunately, perhaps, it will also be remembered for being – under this Government and Chancellor – the last spring Budget.

Recall, though, that Norman Lamont also decided to do something similar more than 20 years ago, but it never happened – because he got sacked. Assuming that it does not happen to this Chancellor, the real action will be in the autumn of each year, as is the case in many other countries.

In spring 2018, there will be a brief summary statement of where the Budget position is, compared with the projections made the previous autumn. Philip Hammond lived up to his sobriquet of ‘Spreadsheet Phil’. Although there were lots of jokes, little in the way of new policy proposals were made, and there was no big ‘vision’ at the heart of the Budget. Maybe this was deliberate on the Chancellor’s part.

He could be well aware that Budget decisions do not decide the path that the economy takes in the medium-term. Much more important are trends in global oil prices, or what its key trading partners are doing, or on decisions made by the US Central Bank.

It is clear that what Trump’s America does regarding its relationship with Russia or NATO or protectionism will have huge ramifications for the UK economy. Also, if there is a crisis in Europe – our biggest trading area – the UK economy will be severely affected, and the Chancellor can only react.

There were, of course, fiscal changes that will have a meaningful impact on the sectors or individuals affected – higher taxes for the self-employed, for instance, did not go down well and could have broken a manifesto pledge not to increase National Insurance contributions (and were subsequently quickly revoked).

Overall, though, the fiscal impact of the changes was quite small. One estimate is that there were 28 new measures this year, compared with 77 in the last Budget. The economic forecasts were adjusted, and public sector borrowing and debt projections were pushed out one year and updated.

These figures themselves tell a big story about the accuracy and usefulness of such a detailed level of forecasting. Comparing the forecasts made this year and those made last year by George Osborne shows a markedly different picture.


George Osbourne

Despite the Brexit vote, the 2016 economic growth forecast of two per cent made by Osborne last year was close to the actual outturn of 1.8 per cent. For this year, he predicted 2.2 per cent versus a projection by Hammond for two per cent – again, close.

Of course, one could make the point that, if you cannot forecast growth for the year ahead with some degree of accuracy, then what’s the point? Further out, however, the GDP forecasts made by Os- borne seem hopelessly optimistic – out by 31 per cent for 2018 (2.1 per cent versus 1.6 per cent by Hammond in the 2017 Budget) and 24 per cent out for 2019 (2.1 per cent versus 1.7 per cent). True, the economic forecasts converge by 2020, but who knows what will happen by then?

Consumer spending has grown more quickly than expected, but business investment is faring quite badly. Weak investment spending has negative implications for productivity and growth, wage levels and ultimately the ability of the government to spend.

Inflation is higher than predicted, not just because of the impact of Brexit on the currency, which was declining anyway, but perhaps a combination of the UK’s persistent current account deficit and poor productivity. More importantly, these economic assumptions have a very outsized impact on government debt and borrowing figures – not least because of the cumulative effect of small changes interacting with the large size of the debt numbers.

Charts 1 and 2 show that the public debt and borrowing are much higher in Hammond’s Budget projections for the period ahead than those made last year by Osborne. Instead of a budget surplus of £11 billion by 2020, there is instead borrowing of £21bn – a £30bn difference.

This difference shows up more starkly in the debt figures – as it cumulates over the period to 2020. Instead of declining in 2018/19, and peaking at around £1.7trn, net public sector debt rises to £1.9trn by 2020, some £164bn more than expected in last year’s Budget. These are large numbers, some 8% of UK GDP in 2020.

The Budget was notable for one enormous omission: it barely mentioned Brexit. This omission might have been on the basis that too much of the deal is unknown at this point to make reasonable assumptions.

Some assumptions could have been made, however, that were not. Such as assuming a smaller inflow of migrants and assessing the economic impact that this could have on tax revenues and economic growth.

What about the payments to Brussels: a request for £60bn for the EU as a divorce settlement is already well flagged. Where will that come from, if not from borrowing?

Assumptions in Budgets need to show less certainty and more uncertainty, with bigger margins of error and less in the way of spurious accuracy.

The real world is not like the path shown in these projections but littered with zig-zagging and twists and turns not considered in the Budget.

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