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Spring Statement 2019

On 13 March the Chancellor of the Exchequer made his Spring Statement to the House of Commons on the state of the country’s finances. Sandwiched between two Brexit votes this statement was always going to be overshadowed, but the accompanying 200 page Economic and Fiscal Outlook publication from the Office for Budget Responsibility (OBR) gives a useful economic overlay. The Spring Statement is not designed to be a platform for the announcement of new measures on tax or public spending as these measures will be in the Autumn Budget.

The Chancellor started his speech by emphasising the years of economic growth already achieved and the growth projected over the next five years. He predicted that the economy would continue to generate new jobs and there would be real wage growth. The assumed wage growth would boost the Treasury’s coffers through the taxation system. The OBR projected growth in UK GDP of 1.2% in 2019, to be followed by 1.4% and 1.6% in the following two years - these forecasts are actually slightly weaker than consensus. Public Sector Net Borrowing was projected to be ‘only’ £29.3bn in the year to March 2020 and to fall over the years to £13.5bn by 2023/24 at which point it would be down to 73% of GDP.

The OBR assumptions implied that the Chancellor had more headroom relative to his previously announced targets. While the growth rate for 2019 had been revised downwards from 1.6%, the rate assumed for following years had increased slightly. It is worth noting that the day before the Chancellor spoke, it was announced that UK GDP rose by 0.2% in the three months to January and by 1.2% over the previous year. This seems anaemic but was a faster annual rate than achieved in Germany and France.

The Chancellor made it clear that his projections were made on the assumption that there was a deal with the EU on Brexit and the phrase ‘deal dividend’ came to the fore. He would decide later how to allocate the assumed addition to his coffers - in particular he did not tell us how much he would be prepared to spend in the Autumn Budget. If there was a ‘no deal’ Brexit, the assumptions would be rather different and he implied that in this scenario the ‘dividend’ would disappear.

Commentators have economic assumptions according to whether one assumes the Prime Minister’s deal is accepted at the eleventh hour, or there is a ‘no deal’ Brexit, or the outcome is ‘fudge and delay’ with the talks dragging on. In particular, business investment has been weak in recent months and it is plausible that with less uncertainty there will be a rebound in the second half of the year. The OBR forecasts are based explicitly on current government policy.

Before the summer, a Spending Review should commence as the government plans for the coming years. Whatever the current political scenario, the next scheduled election is in 2022 and the government has to lift its eyes to long term planning. This should provide ammunition for the Autumn Budget.

 

Robin Younger
Senior Investment Analyst

20 March 2019