EY ITEM Club
UK Budget preview

Spring Budget 8 March 2017

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EY have been sole sponsors of the ITEM Club for 25 years. It is the only non-governmental forecasting group to use HM Treasury's model of the UK economy. Our reports provide a detailed economic analysis and forecast of economic activity for the period ahead. They are independent of any political, economic or business bias.

Budget preview highlights

With some good news expected from the OBR…

The Office for Budget Responsibility (OBR) is likely to deliver some rare good news to the Chancellor by revising down its forecast for public sector net borrowing in the current fiscal year, 2016-17, by £3bn to around £65bn. The improvement reflects a stronger-than-expected performance from tax receipts – but since we’ve also seen stronger-than-expected economic growth, the OBR will probably characterise this as a cyclical improvement rather than a permanent shift.

Also on the cards is an upward revision to the 2017 forecast for GDP growth from 1.4% to 1.6-1.7%. The OBR has more information on which to base its long-term forecast now that the Government has outlined its vision for the UK’s post-Brexit relationship with the EU, although some sizeable gaps remain on future trade and migration policies. On balance, the OBR will probably resist the temptation to make major changes to its forecasts, on the basis that any negative effects of Brexit on growth are likely to emerge outside its forecast horizon of 2021.

While the OBR’s forecast for debt servicing costs might be around £2bn higher in 2020-21 than it expected last November, it’s unlikely to make many other significant changes to its projections. So the £27bn margin for error that the Chancellor put in place against the most important of his new fiscal rules – that the structural deficit should be below 2% of GDP in 2020-21 – should stay largely intact

…major policy changes will probably be left until the autumn…

Meanwhile, fiscal policy faces long-running challenges on both the revenue and public spending sides. But, with the Chancellor having positioned the new autumn Budget as the year’s main policy event, he’s unlikely to use 8 March to announce major policy measures – especially since the recent good news on the economy and public sector borrowing mean there’s little pressure at the moment to fill any fiscal ‘black hole’.

…but some actions are likely

However, the Budget may not be completely devoid of headline-grabbing measures. The Conservative Party’s 2015 manifesto commitments to raise the tax-free personal allowance to £12,500, and the threshold for the 40% rate of income tax to £50,000 by the end of the current parliament, both remain in force. We’re likely to see some further progress towards achieving those goals.

The Budget may also include actions to help relieve the squeeze on household incomes arising from sterling’s weakness and rising oil and commodity prices. These could include a cut in fuel duty, or a freeze or reduction in Air Passenger Duty.

The ‘Singapore option’ stays in reserve…

However, any moves in the Budget towards the UK becoming the ‘Singapore of the West’ post-Brexit, with taxes on businesses slashed, are unlikely. The Government has been careful to reserve this option for an eventuality where negotiations with the EU break down. And, with the corporation tax rate already due to fall from 20% to 19% this April, and then to 17% in April 2020, the UK’s corporate tax regime is already very competitive by large economy standards. However, the Treasury may respond to growing criticism of the business rates regime by bringing forward the switch from RPI to CPI inflation as the basis for future increases.

One area where a change of tack from the Chancellor does seem likely is day-to-day spending on public services. While there was little relaxation of austerity in this area in November’s Autumn Statement, recent high-profile coverage of the pressures on health and social care budgets may prompt the Chancellor to provide more cash in these areas.

…as the fireworks are held back for the autumn

But overall, the final Spring Budget is set to be an unusually low key event, with a lack of major changes in forecasts and a desire to hold back any fireworks for the forthcoming autumn Budget, meaning the Chancellor opts to keep his powder dry – for now.

A low-key Budget – but worth watching

by Mark Gregory, EY Chief Economist

In the Autumn Statement, the Chancellor set out his plan to move the Budget to the autumn from 2017. So it’s no surprise that the EY ITEM Club expects a relatively low-key Budget on 8 March, with no major resetting of policy.

Will it tell us anything new?

The main news is likely to be the Office for Budget Responsibility’s (OBR’s) update to the economic outlook – which we expect to include:

  • A downward revision to the forecast for public sector net borrowing in 2016-17, by around £3bn to about £65bn
  • An upward revision to the 2017 forecast for GDP growth, from 1.4% to 1.6-1.7%
  • An increase to last November’s forecast for debt servicing costs, to around £2bn in 2020-21

Given the current Government’s reluctance to share its early thinking on policy, commentators will be looking behind the headlines for signals on future policy direction.

Probably not on Brexit…

Interest will be especially intense in how the OBR’s forecasts reflect the latest developments around Brexit. In November, the OBR stressed it had been given no inside information on the Government’s negotiating stance. Since then the Government has laid out its plans, including in a White Paper. So, any changes to the OBR’s forecasts on trade and migration will be closely scrutinised.

…or short-term changes to economic policy…

Aside from this, we may see some relatively minor tweaks to policy to buoy up living standards, such as a cut in fuel duty, or freeze or reduction in Air Passenger Duty. With the corporation tax rate heading downwards from 20% today to 17% in April 2020, the UK’s corporate tax regime is already very competitive internationally. Any further action in this area is unlikely – partly because it might be seen as signalling concerns about future inward investment.

…but more long-term thinking would be welcome…

While the Chancellor has shifted major policy moves to the autumn, there’s a risk of focusing too much on delivering Brexit and neglecting other priorities. Two areas where businesses would like action are business rates, and the apprenticeship levy.

  • April will see the introduction of the apprenticeship levy, costing employers about £3bn a year. The Government might water down or delay this policy to help offset cost pressures on business. However, there’s a case for a more fundamental review to clarify the levy’s objectives and whether they’ll be achieved.
  • We may also see business-friendly moves on business rates. These are set to increase each year in line with RPI inflation, with a switch to the (generally lower) CPI measure in 2020-21. The Government might heed business’ concerns by bringing forward the switch. And, if it’s serious about rebalancing the economy, it could consider more radical calls like excluding plant and machinery from property valuations.

…and is needed in certain areas

Recent news reports have seen the NHS and social care emerge as thorny political issues, to the extent that the Government could deliver a smooth Brexit yet still face public dissatisfaction. Any relaxation of the constraints on NHS and social care funding would signal the Government is alive to these issues.

Keeping an eye out for major moves

If the Chancellor meets the expectation for a low-key Budget with no major policy changes, this will suggest he’s reasonably confident about the economic outlook. Any shifts beyond the very basic, may signal areas of concern. Beyond this, more strategic moves would give investors more confidence that the Government is serious about transforming the UK economy, as well as delivering Brexit.

Contact

EY - Mark Gregory

Mark Gregory

EY Chief Economist