Chancellor set for short term productivity and borrowing boost in next Tuesday’s Spring Statement 8 March 2018 Longer term outlook for pay, growth and debt will remain bleak, despite welcome upward revisions The Chancellor is on course to receive a public finance boost of between £7bn and £11bn next week, with the Office for Budget Responsibility expected to deliver a short-term upgrade to the UK’s economic outlook, according to a new report published today (Thursday) by the Resolution Foundation. The report looks at the latest economic data to explore what kind of revisions the OBR might make next Tuesday. With the Chancellor promising a short, policy-free 15-minute Spring Statement next week, any such revisions are likely to take centre stage. Back in November, the OBR delivered the mother of all economic downgrades. Its downward revision to the UK’s productivity outlook alone increased cumulative borrowing by £91bn between 2017-18 and 2021-22. Borrowing in the current year was forecast to rise to just under £50bn, while real annual earnings were not forecast to return to pre-crisis levels until 2025 – leaving the country barely halfway through a 17-year pay downturn. However, a slew of data published since the Autumn Budget point towards a healthier picture in the short term, which should lead to an upward revisions in the OBR’s economic forecasts for the immediate future: On productivity, the UK has recently recorded its two strongest quarters of productivity growth in six years. Productivity growth in 2017 has come in at 0.6 per cent, compared to the zero growth expected by the OBR in the Autumn. On pay, there are some signs of growing wage pressures, with pay rising at annual rate of 2.9 per cent over the last six months. On borrowing, the UK is running a current budget surplus for the first time since 2002. Borrowing now looks set to come in around £40bn this year, an improvement of between £7-11bn on the OBR’s November forecast. The Foundation notes however that these short term boosts are unlikely to remove the big long term challenges facing the Chancellor: On growth, while the UK is benefitting from improvements to the global economic outlook, its relative performance is very disappointing. In 2017, slow UK growth took us from top to bottom of the G7 economic growth league table, below even Italy and Japan. On productivity, if the OBR follows the Bank of England it will revise up short term growth rates but leave longer term forecasts unchanged at historically low levels of roughly 1.25%. On the public finances, while the deficit has returned to pre-crisis levels, our national debt has more than doubled since the late 2000s. At around 85 per cent it remains at levels last seen in the 1960s. Finally, the Foundation notes that while the Chancellor is promising there will be no big new policies next week, significant policy changes will still come into effect in just a few weeks’ time. Over 1.5 million workers are in line for 4.4% pay rise when the National Living Wage increases to £7.83 on 1 April. Much less positively, 11 million working age families are set to feel the effect of the benefits freeze from 9th April 2018, with a couple with two children set to lose £315 on average. Overall, benefit changes coming into effect are set to save £2.5 billion in 2018-19 and will result in an average £135 income loss for the poorest third of households. The richest third of households are largely unaffected by the changes. Matthew Whittaker, Chief Economist at the Resolution Foundation, said: “The OBR ruined the Chancellor’s Christmas by presenting him with a truly terrible set of economic forecasts last November. But while the temperature has continued to fall, the economic picture has started to brighten and we should expect a slightly sunnier outlook next week. “Britain’s revised economic outlook is likely to give the Chancellor more fiscal leeway. However, the broader economic backdrop remains extremely challenging. Britain plunged from the top to the bottom of G7 economic growth league in 2017. “The Chancellor has said he plans to soak up the sunnier economic outlook next week, rather than make any policy announcements. But significant policy changes are still coming in just a few weeks’ time – with a pay rise for the lowest earners but a further squeeze on the living standards of low-income working families, driven by the freeze in working age benefits. “While the Chancellor is firmly committed to a short Spring Statement the challenges Britain faces, from weak growth to tight family finances, are likely to remain long lasting.”
