Waking up on Wednesday morning, the chancellor Philip Hammond could have been forgiven for thinking that he had been dealt a bad hand. Preparing the economy for leaving the EU would tax any chancellor, but he would have also been fully aware of the many non-Brexit related challenges facing the UK economy, such as low investment levels, concerns over skills, funding the NHS and discontent over house prices and availability.
If this wasn’t a difficult enough backdrop, the Office of Budget Responsibility's (OBR’s) recognition – in line with most other forecasters – that the UK economy is both slowing and weakening, will have added to the pressure. The OBR has revised its 2017 GDP growth forecast down to 1.5% from 2% previously, and has also cut its estimates of future UK productivity growth from 1.6% to 1.4%.
However, the Budget provides a platform for the government to set out its broad economic vision and plan for the UK economy and to paint a vision for the British economy post-Brexit: Global Britain with an economy that works for everyone. Business was looking to the chancellor to support short-term domestic demand and provide a boost to confidence, while also setting out a clear vision for the UK economy and providing clarity about future economic policy.
A short-term boost...
It does appear that the Budget measures will provide some short-term support to the economy. The OBR describes the Budget as “a significant short-term fiscal giveaway”, amounting to £2.7bn in the next fiscal year, rising to £9.2bn in 2019-20. The key elements of this are tax cuts, no rise in fuel duty and the removal of stamp duty – alongside an easing of the pace of departmental spending cuts and more public capital expenditure.
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However, as the OBR’s forecasts for GDP growth clearly illustrate, the Budget measures are unlikely to provide either the scale or mix of policy measures required to offset the slowdown in the UK economy. The revised OBR forecasts after this loosening still imply that GDP growth between 2017 and 2022 will be 25% lower than their previous forecast.
However it may only scratch the surface long term
The chancellor started his speech by saying that he wanted “to look forwards not backwards” and to “seize the opportunities for Britain”, rightly identifying the need to increase UK productivity. He noted that achieving an improvement would require higher levels of investment across the economy – consistent with EY ITEM Club’s recent report on UK business investment – in addition to an improved level of skills and a higher rate of investment in R&D.
However, while the Budget contained proposals in all of these areas, the impact is unlikely to be significant. The increase in R&D spend and tax reliefs are positive, but small scale. The increase in the productivity fund is welcome but total investment over the period of £31b rather than £23b will only scratch the surface. In order to match our peers, the UK needs to generate increased investment of around £50bn a year. More spending on maths and computing and greater resources for retraining are welcome but nowhere near the proposals set out in the Made Smarter review.
Businesses are likely to proceed with caution
Taking the Budget as a whole, it seems likely that businesses will continue to proceed cautiously. The promised launch of the next stage of the Industrial Strategy is now even more important.
Mark Gregory is chief economist at EY