The Chancellor stays in neutral - EY ITEM Club comments

08 March 2017

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This ‘last’ Spring Budget was not expected to contain many fireworks and, indeed, this was the thinnest Budget report since at least 1997.

The fiscal package was broadly neutral. The ‘giveaways’ included some modest extra cash for social care and the NHS. The ‘takeaways’ were dominated by a rise in National Insurance Contributions for the self-employed and a reduction in the tax-free allowance for dividend income, both aimed at levelling the tax playing field for different types of workers. These measures raise a useful amount of cash.

The OBR’s economic forecast was also neutral in the sense that its upward revision to this year’s GDP growth, from 1.4% at the time of the Autumn Statement to 2.0%, was offset by downward revisions to the later years of the forecast. That followed directly from the OBR’s judgement that the better than expected performance of the economy since Brexit did not indicate a fundamental improvement in economic performance.

These GDP revisions were clearly reflected in the pattern of Government borrowing. However, the downward revision to net borrowing this year, taking it down to £51.8bn, is a mixed blessing for the Chancellor. It means that borrowing goes back up next year to £58.3bn, although as the OBR noted, this is below its November forecast. 

The OBR judged that the Government was likely to meet its fiscal objectives for this Parliament. Indeed, it believes that the Government has a leeway of £26bn on the central requirement for a structural deficit below 2% of GDP in 2020/21. However, it said that the Government would be challenged to meet its objective for the next one which is to ‘return the public finances to balance at the earliest possible date in the next Parliament’, stating that an ageing population and cost pressures in health are likely to put upward pressure on the deficit over that period.

The OBR forecast closed before the softer Purchasing Managers Survey emerged last week. The OBR sees the strong momentum in the economy continuing into the first quarter of this year, posting a quarterly increase of 0.6%. This now looks optimistic, as does the forecast for 2% growth this year.

The OBR did not change the assumptions it made in the autumn about the shape of Brexit, despite the greater clarity that has emerged since then. This seems sensible in view of the uncertainty that hangs over the shape of the forthcoming negotiations. The main impact of the referendum result so far has been on the exchange rate and inflation, which is clearly reflected in the OBR forecast.

The Chancellor flagged up the increase in real wages seen since 2010 and, in particular, the improvement in the position of the lower paid brought about by the National Living Wage. However, going forward, these improvements are likely to be slowed to a crawl by the resurgence of inflation. The Chancellor did very little to compensate for this, simply pointing to changes in the personal allowance and the National Living Wage which had already been announced. The cash freeze in many working-age benefits remains in place. The only concession to lower income households was the flexibility on the two-child limit for those claiming child tax credits, announced previously. 

 

Come the autumn, further support for the economy and the lower paid may be necessary, but for now the Chancellor is sticking in neutral gear.