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Spring Statement 2018

Chancellor Philip Hammond has just presented a first Spring Statement. This is part of a new timetable which will see the main Budget being held in the Autumn. There were no new tax or spending commitments unveiled.

Ahead of the Chancellor’s speech the media predicted he would talk about a light at the end of the tunnel and he was indeed able to talk about the first sustained fall in debt for 17 years. The Office for Budget Responsibility (OBR) has the remit of producing economic forecasts for the Chancellor and had previously expected an annual central government monetary deficit of £50bn in 2017/18. The new forecast is £45.2bn. Debt expressed as a percentage of Gross Domestic Product is now predicted to peak at 86.5% in 2018/19 before falling steadily to 77.9% in 2021/22.

Whilst the improvement in the national finances is welcome, the debt still equates to £65,000 per household and the cost of interest payments on the debt is a sobering £50 billion per year. The Treasury points out that this is more than the combined spending on the nation’s police and armed forces. In the current year £66.7 billion of gilts will be redeemed and in total £102.9 billion will have to be issued to balance the books. In the late 1990’s more gilts were being redeemed than were being issued and Debt to Gross Domestic Product troughed at around 30%.

Though the Chancellor’s speech was brief the OBR sets out its projections at great length. The latest projections from the OBR are for growth in the UK economy of 1.7% in 2017 and 1.5% in 2018. Even though these are rather anaemic figures they represent an improvement on the 1.5% and 1.4% previously projected. However, according to the OECD, the UK economy will still have the lowest growth in the G20. More encouragingly, the OBR said that CPI inflation would fall back to the Bank of England target of 2% by the end of 2018.

There were calls for the Chancellor to increase spending at this time. Although he did not pull rabbits out of the hat, he did remind the House of Commons of spending measures he had announced in the Autumn Budget and held out the prospect of a detailed spending review in 2019 which would indicate the scope for extra spending in the medium term.

The projections of the OBR are interesting. Looking at real disposable income per capita they see the 0.5% fall in 2017 being followed by an increase of 0.6% in 2018, two years of 0.1% falls and then increases of 0.7% and 0.9% in 2021 and 2022 respectively. Since the scheduled date of the next general election is in May 2022 the government will be hoping that the projections are correct and that as a result voters have a feel good factor in 2021/2022.

On a more immediate tack the National Living Wage will increase in April and over two million people will be expected to benefit in some way. The tax-free personal allowance will also increase to £11,850 in April. The Treasury statement notes this means the typical taxpayer will pay £1,075 less income tax than in 2010/2011 as a result of the increase in the personal allowance (early 2010 was the last period in which we had a Labour Government).

Housing was an obvious area for comment and the Chancellor reminded us that in the Autumn Budget he announced a programme to invest at least £44 billion over the next 5 years to put the UK on track to raise the supply of homes to 300,000 a year on average by the mid 2020’s. It is salutary that the well-known report on housing supply in the UK by economist Kate Barker was presented in early 2004 and in spite of governments coming and going the UK is still struggling with the shortage of suitable housing.

With no surprises at all, this Spring Statement has had an understandably muted impact on financial markets.

 

Robin Younger
Senior Investment Analyst

14 March 2018