Spring Statement: UK economy still in the tunnel
Philip Hammond presented his new, concise Spring Statement with uncharacteristic levity. Celebrating consistent growth and high employment, he declared himself to be “positively Tigger-like” in contrast to the “Eeyores of Labour”, whom he accused of talking the country down.
Yet despite a very modest upward change in the forecasts, the Office for Budget Responsibility (OBR) points to growth of just 1.5% or below in each of the next five years – the lowest rate in modern times. Moreover, the OBR states that: “On the basis of the latest information, we judge that the economy was operating slightly above potential in the fourth quarter of 2017 – by 0.3%. This is 0.2 percentage points higher than we judged in November.” That suggests the economy is overheating, adding to inflationary pressure.
Nonetheless, the Chancellor was in upbeat mood as he delivered an overtly political statement. Mr Hammond declared that with debt and borrowing down, the UK economy has “reached a turning point” and that there is “light at the end of the tunnel”.
Looking ahead, he said that in the Budget later this year he will “set an overall path for public spending for 2020 and beyond”, with a detailed Spending Review to take place in 2019. The Chancellor hinted that if the public finances continue to improve, “then, in accordance with our balanced approach, and using the flexibility provided by the fiscal rules … I would have capacity to enable further increases in public spending and investment in the years ahead”.
Battle lines drawn
That hints at the internal debate now gripping the Conservatives, as they look to counter the anti-austerity offensive being pursued by Labour. This was set out by John McDonnell, who used his response to attack the “indefensible spectacle of a Chancellor congratulating himself on marginally improved economic forecasts, while refusing to lift a finger as Councils go bust, the NHS and social care are in crisis, school budgets are cut, homelessness has doubled, and wages are falling”.
Hammond is under pressure from across the Tory Party to loosen the purse strings. Both Ken Clarke and John Redwood used interventions to call for increased public spending. But as Paul Johnson of the Institute for Fiscal Studies points out, the decision is not straightforward and the Chancellor faces a “stark choice”: respond to pressure to ease up on austerity, or make a serious effort to meet the pledge to balance the budget. He is “unlikely to be able to do both”.
For now, Mr Hammond stuck to his promise not to announce any new tax or spending commitments, though he did publish a series of consultations on taxing large digital businesses, ensuring online companies pay VAT, as well as on how to tax single-use plastics.
Brexit the elephant in the room
Despite the talk of tigers and donkeys, the elephant in the room remains Brexit, and the OBR produced an estimate of the cost of settling Britain’s outstanding liabilities to the European Union: £37.1 billion, three quarters of which would fall due in the next five years. The OBR warned that the current account deficit remains large and is likely to fall only slowly, meaning the UK is vulnerable to a drop in investor confidence if there is a disorderly Brexit.
That remains a possibility, with the EU continuing to play hard ball. Michel Barnier addressed the European Parliament today and delivered a direct rebuttal to some of the key ideas in Theresa May’s recent speech – specifically on mutual recognition and UK involvement in EU agencies. A smooth exit and a future trade deal are far from guaranteed.