Monday saw the final Budget from the chancellor, Philip Hammond, before Brexit is due in March 2019.
So what was the story of this fiscal statement? What happened to the growth and borrowing forecasts?
How significant are the new spending commitments?
What about tax cuts? And does it really mean the end of austerity?
What happened to the overall forecasts?
On the official GDP forecasts there was not very much change. Growth this year is revised down relative to the Spring Statement in March from 1.5 per cent to 1.3 per cent, due to the disruption from the “Beast from the East” snow storms in the first quarter.
Projected growth in the Brexit year of 2019 was revised up to 1.6 per cent, from 1.3 per cent previously. And for 2020 there is an upward revision to 1.4 per cent from 1.3 per cent previously.
The Office for Budget Responsibility (OBR) said this was due to a revision in how low it think the jobless rate can go before damaging inflation kicks in and the Bank of England has to raise interest rates to slow the economy.
Growth in 2021 and 2022 is seen unchanged at 1.4 per cent and 1.5 per cent. It creeps up to 1.6 per cent in 2023.
The bigger point here is that this is a pretty weak outlook for GDP growth relative to what we expected before the financial crisis, reflecting a downbeat analysis from the OBR about our national potential productivity growth.
And the OBR has previously said that Brexit will not make this bleak picture any brighter.
What happened to borrowing forecasts?
Here there was more action.
The OBR has changed its view quite a lot on how much the government is likely to borrow in the current fiscal year since the Spring Statement.
It now thinks public finances are around £12bn healthier than previously, meaning the state will borrow £25bn rather than £37bn in 2018-19.
This is a response to stronger than expected tax revenues.
Furthermore, the OBR estimates that the fiscal improvement would have endured over the next five years too and that if the government had done nothing it would have been on course to run a small surplus in 2023-24.
However, the government has not decided to do nothing. Instead the chancellor is spending the windfall on meeting various promises such as ratcheting up funding for the NHS and meeting the Tory pledge to raise the income tax personal allowance to £12,500 and the higher rate threshold to £50,000 from 2019-20.
The result is that the overall borrowing trajectory does not really change relative to the previous forecast.
Borrowing in 2022-23 falls to £21bn, virtually the same as projected in the Spring Statement.
How significant is this new spending?
It’s big. This is actually the largest “discretionary fiscal loosening at any fiscal event” since the OBR was founded in 2010.
There is to be around £1.7bn spent on making the new universal credit welfare system more generous, but the lion’s share of the new spending is accounted by the extra NHS funding, which will rise by £23bn by 2023-24.
Is this really the end of austerity?
It’s hard to make that case from the perspective of government departments.
The Budget implies day-to-day departmental spending growing at an average of 1.2 per cent a year in real terms from 2019-20.
Mr Hammond implied in his speech that this was consistent with Theresa May’s claim that austerity is ending.
Yet the OBR pointed out that if one looks at current spending per head on departments other than health, spending is still falling over the coming years.
“Unprotected departments will still, on average, see cuts in every year from 2020-21 and their per capita real-terms budgets will be 3 per cent lower in 2023 than 2019,” noted the Resolution Foundation think tank.
And the welfare spending does not cancel out the other cuts that are still working their way through the system.
What about Brexit?
Here the chancellor’s fiscal rules are not particularly demanding.
They simply require him to have the deficit below 2 per cent of GDP in 2020-21. At the moment it’s forecast to be 1.3 per cent in that year, implying around £15bn of fiscal space – unchanged from the Spring Statement.
Mr Hammond argues that, if there is a smooth Brexit, he might be able to use this space to cut taxes or increase spending by that amount.
He also thinks that a smooth Brexit will boost consumer and business confidence and therefore overall growth, creating even more leeway.
The chancellor describes all this as a “deal double dividend”, hoping that the prospect of this fiscal reward will incentivise Conservative MPs not to reject Theresa May’s hoped-for withdrawal agreement with the European Union.
How lucky has the chancellor been?
Reasonably lucky. The OBR said this was the biggest windfall for a chancellor since 2013 in terms of borrowing downgrades. Without these upgrades, to pay for the NHS funding rise, Mr Hammond would have been forced to either raise taxes or to let borrowing increase.
Robert Chote, the head of the OBR, notes that the government had committed itself to the additional NHS spending long before it was informed of the public finances outlook upgrade.
Yet there have been bigger windfalls handed to chancellors since the OBR was established. Moreover, the OBR stressed that this is all merely a provisional estimate, which could rapidly be reversed at future Budgets, especially if Brexit is chaotic.
“Experience shows that a favourable revision in one forecast can be followed by an unfavourable one in the next,” said the OBR. The chancellor – and the country – have been warned.
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