As most of us currently working in or with UK organisations know, today is usually the day when the Chancellor appears outside 11 Downing Street and holds aloft the famous red briefcase, before heading to Westminster to announce his tax plans for the coming financial year. However, in a break to tradition, the Budget now happens in the autumn and we’ll have to wait until November to witness the usual raucous affair.
Instead, today was simply a Spring Statement, an update on how the economy is performing (in the Chancellor’s eyes).
Key OBR Forecasts:
- UK Growth – 2018 forecast up from 1.4% to 1.5% (1.3% for 2019 and 2020)
- Debt – to fall from 86% to 78% by 2022
- Budget – a small surplus to be realised by 2018/19
- Inflation – to fall to target (2%) over the next 12 months
- Real earnings - to rise from the end of Q1 2018
- Jobs – 500,000 more jobs by 2022
Light at the end of the tunnel?
Given some of the figures published by the likes of the Office for Budget Responsibility (OBR) prior to his autumn budget speech, Philip Hammond could have come under pressure to change course. However, he will be relieved that better-than-expected indicators have preceded this speech.
In short, the economy is growing a little faster than expected (2017 growth up to 1.7% from the 1.5% forecast), despite the uncertainty of Brexit. Wages are increasing, productivity figures are improving and tax receipts are finally covering Government spending. So, all’s good then?
Well, as ever, context is all-important and whilst wages increased by 2.5% last year, price inflation increased to 3% due to the lower purchasing power of the Pound. In real terms, wages are still below 2008 levels. Having said this, the Bank of England forecasts that wages will increase by 3.1% over 2018 and will overtake inflation. This view is backed by the OBR.
Source: Office for National Statistics, Analysis of real earnings: February 2018
Last year the OBR produced a gloomy forecast about the UK’s productivity (a long-running issue for the UK versus other G7 nations) and this element filtered into lower growth predictions and the need to increase borrowing. Not what the Chancellor wanted to hear!
Source: Office for National Statistics, International comparisons of UK productivity (ICP), first estimates: 2016
However, it seems the OBR may have jumped the gun and productivity per head for the final two quarters in 2017 actually rose by 0.8-0.9%. These figures will of course need to be sustained, and improved upon, to determine whether the UK is making progress on this key indicator of economic health.
For context, the Independent reported last year that the German workforce is 27% more productive than the UK workforce, which means that German workers only need work four days per week to produce the same output as UK workers over five days. There are many factors that impact productivity, including infrastructure needs, time that workers spend commuting and the use of technology to help employees reach their full potential.
Greater productivity increases a nation’s wealth and this segues nicely into the key focus for the Chancellor – the national debt. Currently this stands at an eye-watering 86% of GDP (£1.8tn), which equates to £65,000 of debt per household. For further context, this debt incurs interest payments of around £40bn (depending on which figure is applied), which exceeds the £37bn spent on defence.
Whilst there are differing points of view about whether the Government could afford to stretch this figure further (in order to deliver greater investment) it should be remembered that pre-2008 the figure was under 40%. Furthermore, as the Chancellor stated to Andrew Marr on Sunday, ‘all the international organisations recognise that (86%) is higher than a safe level.’
The Chancellor is right to be wary about this ratio, given that we would have little room for manoeuvre should another financial crisis occur and these events tend to be cyclical (the next one may not be far away). Of course he has to balance this requirement with the need to deliver sustainable public services and the debate about the need for austerity will continue for now, although it is likely that the Chancellor is saving some form of ‘giveaway’ for a rainy day (i.e. the next general election and the 1st October deadline for negotiations on a Brexit deal).
Next Steps/ Summary
The Chancellor (or ‘Tigger’ as he now likes to be called) looks to be very much in control and no doubt his position within his party has also strengthened, despite the political wranglings going on behind the scenes. This Statement was a call to maintain course and to retain a balanced view of the economy, but the Public Sector will be hoping for much more in the autumn budget (November). In the meantime a Public Sector pay-rise of 6.5% over the next three years looks close to becoming a reality.