Spring statement: the economists' verdict

ChancellorPhilip Hammond delivered a stripped down update on the UK economy in his Spring statement on Tuesday. With no major shifts on tax or spending, what did that message actually mean in terms of UK prosperity?
Economists from a range of backgrounds, including some of the UK's largestindustry bodies and investment funds share their assessment ofhis performance, and what the content of the speech alongwiththe latest Office for Budget Responsibility really revealed.

Keep debt falling

Rupert Harrison:Portfolio manager, BlackRock (former Treasury chief of staff)
The sub-title of Stanley Kubricks classic Cold War satire is How I learned to stop worrying and love the bomb. Many of the Chancellors political opponents appear to have taken this message to heart when it comes to a different kind of bombshell the UKs national debt.
I suspect Philip Hammond is rightly worried that the electorate, and maybe even some in his own party, might do the same. Indeed, whether or not our national debate goes full Dr Strangelove over the next few years may be the most important political question we now face.
Spring statement: the economists' verdict

Rupert Harrison
To be clear, this is a problem born of success. A budget deficit that was 10pc of national income in 2010 a peacetime record is now just 2pc, lower than before the financial crisis. The Government can be forgiven for trumpeting this formidable achievement. The risk is that it sounds like mission accomplished and distracts from another striking fiscal fact: our national debt, which was below 40pc of national income before that record deficit, is now 85pc of GDP.
Why not learn to stop worrying and love the debt bomb? Its no longer growing. If interest rates stay low and the economy keeps growing it wont pose a risk to the economy.
The UK's current account deficit is no more
The problem is that carrying such a high level of debt into the next crisis whenever it comes would leave the UK dangerously exposed. Hammonds solution is what he calls a balanced approach. I suspect what this means in practice is that any future upside surprises for the public finances will be spent rather than saved, as long as the debt keeps falling.
Regardless, we should learn to keep worrying about the debt.

Brexit was the elephant in the room

Gerard Lyons?: Chief economic strategist, Netwealth Investments
The economic message in the Spring statement was a positive one, and rightly so.
The Governments finances are improving at a faster pace than expected. This can continue helped by debt dynamics as nominal GDP, which is economic growth plus inflation, rises at a rate far higher than the level of government bond yields. These should stay low as inflation decelerates.
The main policy message was that of a balanced approach. This makes sense. If we didnt know it already, austerity is dead. As the budget deficit falls, the Chancellor will use his additional headroom to boost spending, as well as cutting taxes gradually and banking some of the gains to lower the deficit further. So reducing the deficit is not the only focus of policy.
Public sector debt is forecast to fall at a faster rate
Brexit was the elephant in the room as it was barely mentioned. The good news is the Chancellor acknowledged the ?3bn set aside in preparation for a no deal is being allocated. This is good planning. By the time of the autumn Budget the focus should be on the opportunities that Brexit can help deliver, as progress should have been made on a trade deal. That might go some way to addressing the problem of low investment. While uncertainty over Brexit is weighing on plans, sluggish investment has been a feature of the last decade.
The economic numbers are improving. Real wages are expected to rise by this summer, as higher wage growth occurs alongside falling inflation. Further good news is also expected on employment. Remember the Treasury had forecast massive job cuts following a Leave vote in the Referendum. This has not happened. Employment is expected to keep rising throughout the next five years. As the Centre for Social Justice has pointed out, employment is the best path out of poverty, so this strong jobs market is good news.

A mixed productivity picture requires upskilling managers

Yael Selfin: Economist KPMG
The Chancellor has signalled that we should expect further investment to improve productivity over the coming years. That will put money in the right direction, but more will need to be done to raise productivity levels and secure a more prosperous future for people here.
Investment in physical infrastructure is important, ranging from transport and housing to the increasingly vital areas of artificial intelligence (AI), blockchain and other innovative technologies, where it would be great to see further concrete efforts to upgrade the UKs mobile phone and broadband networks for a start.
Investment cannot focus solely on physical assets. The future lies in our people and talent. Some of the stories I am hearing from clients point at the difficulties in implementing the investment companies are making in new technologies. Investment in our education system is vital for that, focusing on STEM subjects (science, technology, engineering and mathematics), without neglecting communication skills and creativity, which will be in greater demand in a world of AI machines.
Spring statement: the economists' verdict

Yael Selfin, KPMG chief economist
Helping management reap the potential benefits of new technology could also make a big difference.
The mixed productivity performance among UK companies across most sectors points at a varying degree of management skills, and initiatives to help upskill managers may boost UK productivity and its long-term growth prospects.
It is also possible that we are now experiencing a bit of a lull before new technologies get adopted en masse. This could mean productivity will be better in future, and growth will be higher than predicted, giving the Chancellor more room to act in later years.
Whatever scope there is in future for the Chancellor to increase spending, business will respond better if the direction is clear. Simplifying incentives and striving to provide a stable environment can go a long way to encouraging businesses to invest more. Even with better prospects for public finances, the Chancellor will not be able to rely on government investment alone to boost the countrys productivity. It is the provision of the right climate for business that will make the most difference to the future of the UK economy.

Let tax cuts be the priority

Ruth Lea Economic Adviser, Arbuthnot Banking Group
There was really only one surprise today. It had been widely expected that the OBR would upgrade its GDP growth forecasts in the wake of the better-than-expected 2017 outturn, as well as improve the public finances projections.
In November the OBRs pessimism about productivity saw their forecasts take a distinct turn for the worse. GDP growth for 2017 was revised down to 1.5pc with downgrades for subsequent years. The ONS currently estimates growth at 1.7pc for 2017, which will probably be revised higher. But the OBR has resisted a more-than-marginal upgrade, now forecasting GDP growth of just 1.5pc in 2018 (from Novembers 1.4pc) to be followed by just 1.3pc in both 2019 and 2020 (unchanged). The main risk is that they are still being too pessimistic.
GDP growth has been revised up in the Spring Statement
Turning to the public finances the OBR has modestly improved its view of the outlook, reflecting the better outturns for the current year. Public sectornet borrowing ?(PSNB) is now expected to be only ?45.2bn for 2017-18, compared with Novembers forecast of ?49.9bn.
The Chancellors two key fiscal targets look as though they should be easily met. The first is the fiscal mandate, which states the cyclically adjusted PSNB, the structural deficit, should be below 2pc of GDP by 2020-21. The OBR still estimates a structural deficit of 1.3pc of GDP in 2020-21, with 0.7pc headroom. The second, the supplementary target, states public sector net debt (PSND) as a percentage of GDP should be falling in 2020-21. The OBR expects this to peak in 2017-18 and fall in subsequent years. This is the Chancellors light at the end of the tunnel.
Of course, the brighter outlook for the public finances has led to a chorus of demands for higher spending, not least of all on the NHS, and an end to austerity. But this is all very premature. Yes, debt as a percentage of GDP is expected to fall. But debt, which now tips the scales at over ?1.7 trillion, or around 85pc of GDP, most certainly is not. So the Chancellor is absolutely right to stick with prudence. And, insofar as there is some room for fiscal easing, let tax cuts be the priority.

It wasnt a non-event, it was a valuable insight into No.11s thinking'

Chris Sanger?: Head of tax policy, EY
Philip Hammonds Spring statement was reminiscent of the pre-Budgets of old, with updates on the economy, a few jokes, and an outline of the tax policies that may be brought in. In keeping the announcements to a minimum, the Chancellor is to be congratulated, but there was still plenty to get into. From a tax perspective, the top of the consultation pile was not actually a consultation but an update on the UKs approach to taxing the digital economy. This arms the Chancellor with proposals to take to the G20 next month, and the EU later this month, and again demonstrates the UKs determination to lead this debate.
Another contentious area was the VAT threshold, frozen in the last Budget. In this consultation, the Government recognises the business view is divided over whether it is good to have the highest threshold in Europe. It raises the risk that businesses near the threshold will stop earning more revenue in order avoid having to register, and looks at options to address this. Following the work of the Office of Tax Simplification, this looks to be the right type of consultation to raise at a Spring statement.
Spring statement: the economists' verdict

Chris Sanger, head of UK tax policy, EY
We also saw a call for evidence on using the tax system to address single-use plastic waste, with a foreword by the Chancellor. In seeking to avoid being accused of just grabbing cash, the Chancellor has broken the Treasurys prohibition on hypothecation and offered to earmark some of the tax revenues to encourage the creation of new greener products and services.
Beyond these measures, we saw a number of other items, including split VAT payments so that tax is paid directly to the Exchequer rather than to the vendor, and extending tax relief for training to the self-employed and training funded by the employees. Finally, we also saw the publication of the Treasurys Consultation Register, something definitely needed amid the plethora of calls for evidence and consultations.
So, the Chancellor has delivered on his promises and provided greater opportunity for consultation. The extra time to consult is very welcome and should allow discussion of topics while the ideas are forming.

EU negotiations will be crucial if the UK is to beat forecasts

Mike Bell:Global market strategist, JPMorgan Asset Management
Philip Hammond fulfilled his ambition of a Spring statement that didnt include any major changes to tax or spending. The key risk he faced in moving to this one Budget world was a new set of projections from the Office for Budget Responsibility, which showed him breaking his fiscal rules. This was not negligible given that a considerable amount of the headroom against the rules was used in the last Budget with a number of spending giveaways.
In the event, the OBR revised up its forecasts for growth marginally. However, the improvement was deemed to be cyclical and so the forecasts for structural borrowing against which the Chancellor has established his fiscal rules was unchanged from November.
GDP growth has been revised up in the Spring Statement
According to the IMF forecasts in January, the UK has slipped dramatically down the international league table. The UK was joint top of the G7 table with Germany after growth of 1.9pc in 2016. The IMF is now forecasting growth of just 1.5pc this year, which is second to bottom. Other G7 economies are seeing growth accelerate meaningfully whereas growth in the UK has moderated. A recovery in business investment elsewhere and its absence in the UK explains a lot of this shift.
The uncertainty caused by the ongoing Brexit negotiations is often cited as a reason for business reluctance. The talks are now reaching a critical stage. If all goes well a recovery in business confidence could support growth through this year and into 2019.
The Chancellor said that forecasts are there to be broken.
A successful negotiation and ongoing trading relationship with the EU will play a critical role in whether these forecasts are exceeded.
If they are ?not then, come ?the autumn Budget, the Chancellor will face cyclical pressure to support the economy on top of the usual structural departmental pressures, including funding for the NHS.

Dont let tech tax hold us back

Tej Parikh?: Economist, Institute of Directors
Spring statement: the economists' verdict

Tej Parikh from the Insitute of Directors
The Chancellors keep calm and carry on approach with no significant tax or spending announcements in the statement will be welcomed by business leaders.
With the precise nature of Brexit still being ironed out, firms would rather avoid further chopping and changing in Government policy as they weigh up a swathe of potential changes to trading, supply chain, and regulatory relations with the European Union. As such the shift towards a single fiscal event each year is a positive for businesses seeking certainty in policy and looking to avoid the costly and cumbersome burden of complying with changing laws and regulation.
Continuity should also give policymakers the space to push forward with the raft of measures introduced in Novembers Industrial Strategy. Business leaders will be seeking deeper engagement with the Government on its long-term vision to bolster skills, infrastructure, and innovation. Action in this area will be vital to support firms to confidently commit to investment decisions. Indeed, the Chancellor was right to place productivity firmly on the agenda in his speech, particularly as the Office for Budget Responsibilitys (OBR) forecasts for it remained downbeat.
From a fiscal perspective, the decision to effectively bank the faster than expected improvements to public finances will be seen as a prudent move from the business communitys perspective. It will be a useful buffer while Brexit negotiations are ongoing, and as the global economy weathers the potential impact of US steel tariffs.
Meanwhile, the OBRs upgrade to its near-term growth forecasts will buoy business confidence in the underlying resilience of the UK economy, particularly in the face of uncertainty. And, should the economy continue to confound expectations, it could give the Chancellor some room to manoeuvre on tax reliefs and incentives for businesses and entrepreneurs in the autumn.
Concerning thecorporate tax and digital economy consultation announcement, while the taxation of certain global business models may well require action, UK business leaders would want this adopted with co-operation at an international level. Otherwise, it may unnecessarily hamper the countrys relative competitiveness as a destination for business and investment.
See also:
Leave a comment
  • Latest
  • Read
  • Commented
Calendar Content
«     2018    »