Budget round-up

In my day job, when called upon to provide commentary for clients, I essentially face two choices: Either inform them as quickly as possible, sure in the knowledge that you are not going to cover all bases, or provide the most in-depth piece looking behind the data for things that are not obvious at first sight. It is a difficult trade-off, particularly when you know that your better-resourced competition is capable of producing in-depth analysis at speed.

Analysis of the UK budget always falls into the category of issues where you know that there are nuggets waiting to be mined but if you spend too long looking for them, the commentary will soon be out of date. After all, the volume of material available online once the Chancellor’s speech has finished is huge. The OBR’s Economic and Fiscal Outlook is a guide to all aspects of the UK macro economy that you would ever need to know (and many that you didn’t). It is all a far cry from the days when the best we could do was run down to one of London’s mainline stations to pick up a copy of the Budget Red Book.

With some hours having passed since Philip Hammond presented his parliamentary statement, did I discover anything obvious that I missed? Nothing really springs to mind, although one nugget which jumped out at me after having looked through the EFO  was Box 2.1 on pp27-28 which highlighted that real GDP in 2012 is today assessed as being more than 2% higher than was measured at the time (see chart). This matters because the starting point against which forecasts were made five years ago was better than anticipated and goes some way towards explaining why the deficit in recent years has come down so sharply.

Turning to the overall content of the budget, much has been made of the significant downward revisions to the GDP growth forecasts, which constrain expected revenue growth and mean that the deficit at the end of the forecast horizon (extended to 2022-23) is projected at 1.1% of GDP versus 0.7% in March. So it’s been revised up a bit? So what? As I pointed out in a recent post, what really matters is debt stability and both the OBR’s and my own forecasts suggest that the debt-to-GDP ratio is likely to start falling in the next year or two. I would in any case be tempted to treat the significant downward productivity revisions with a degree of caution. It may not take much to persuade firms to slightly raise their capital investment and thereby substitute capital for labour, which may make the overall labour productivity figures look better. As the data revisions example shows, if current data are not measuring the true state of the economy accurately, this introduces major uncertainty into the fiscal projections.

Digging through the Budget Red Book, Table 2.1 suggests that today’s fiscal giveaways total £25bn over the period to 2022-23, with spending increases of £18bn and tax cuts of £7bn. Of the measures announced today, 30% is accounted for by additional NHS spending and a further 37% by measures to boost affordable housing. Almost a quarter is accounted for by pre-announced (but not costed) policy decisions and a further 12% from Brexit-related spending. The net effect of the remainder is small change. It all feels a bit underwhelming. Moreover, Table 2.2 indicates that £19bn will be clawed back from measures announced in previous budgets (with most of this occurring from a change in the discount rate applied to public service pensions). Thus the net effect of the fiscal plans announced today is minimal – £6bn over the next five years is peanuts – and clearly policy is not as bountiful on the surface as it appears.

This brings us to the politics of the budget. If the Conservatives hoped to deliver a big bang to impress the voters, they are going to be sorely disappointed and if Philip Hammond’s position was insecure ahead of the budget, I don’t see how it can be much more secure now. But it was the best he could deliver given the constraints under which he was operating. It is not the big bang package his party wanted and arguably he could have done more. Indeed, by pursuing the policy of corporate tax cuts and refusing to uprate fuel duties in line with inflation, there is some low-hanging fiscal fruit to be picked if he is serious about closing the fiscal gap. But to the extent that this budget was about trying to repair trust after the election, such items will have to remain hanging on the tree for now.