Britain’s finance minister, Philip Hammond, has been blessed with good timing. His spring statement on the state of the UK economy was delivered with a spring in his step – in his own words, he was “positively Tigger-like”. His address follows hard on the heels of some rather good economic news, though this news originates beyond the UK’s shores.
Global economic growth accelerated to 3.7% in 2017, comfortably beating forecasts. Among the UK’s leading trading partners, renewed strength of economies in the euro area is particularly notable. This, along with the lower exchange rate – the pound is still worth around 14% less against the euro than before the Brexit vote in 2016 – has helped boost UK exports and sustained output growth.
With data on the aggregate number of hours worked seemingly reaching a plateau, this has led to a long awaited improvement in productivity. Whether this can be sustained, given the UK’s very poor recent record, remains to be seen.
All of this has partially offset the adverse effect of the uncertainty surrounding the Brexit process. Only partially, though; it has not offset things entirely. While output growth has been better than expected, the UK has nonetheless slipped in relation to other major economies.
In turn, tax revenues have risen substantially over recent months. Official HMRC receipts, which include income tax, for the three months ending in January were almost £8 billion higher than for the corresponding period a year earlier. This has significantly improved the state of the public finances, to the extent that the government’s current budget has moved back into surplus.
So the backdrop of a world economy that is performing more strongly than anticipated, alongside public finances that are in a better shape than expected, has allowed Hammond to bear glad tidings. At the time of the budget last November, the Office for Budget Responsibility (OBR) watchdog predicted that, in 2018, output would grow at a rate of just 1.4%, followed by 1.3% growth in each of 2019 and 2020.
The forecast for the current year has now been revised up slightly to 1.5% (though the forecasts for the next two years remain unchanged and are not far out of line with the rather muted OECD forecast published at the same time - and indeed further out, in 2021 and 2022, growth forecasts are lower now than they were in November).
Meanwhile, inflation – which had been expected to peak at 2.4% in 2018 before falling back to 1.9% in 2019 – is now expected to fall to 1.8% next year.
The forecasts for the state of the public finances are likewise improved. In November, the forecast level of national debt amounted to 86.1% of GDP in 2019-20, but this figure has now been adjusted downwards to 85.1%.
No end to austerity
All of this good news does not, however, herald a giveaway. The national debt remains at well over 80% of GDP – still high by historical levels, and well above the 60% reference value defined in the EU’s Maastricht Treaty protocols.
Nonetheless, the UK probably still has quite a lot of fiscal room for manoeuvre, with some economic estimates suggesting that national debt could rise to over 130% of GDP without causing damage. After all, over 70% of government securities that are issued to finance the national debt are held by UK residents, so the national debt is largely money that owed to itself. Nevertheless a lower debt to GDP ratio does offer the government more scope to fight the next crisis whenever that might come.
One option would be to allow economic growth to bring this 80% debt to GDP figure down over time – simply by letting the denominator (that is, GDP) rise. But Hammond wishes to continue to work on reducing the numerator (the deficit) too. So, despite the Tigger-like delivery, and a hint of jam tomorrow, there was little in the spring statement to suggest that austerity is at an end.
Those who have suffered disproportionately from the welfare cuts of recent years may have wished for better. Reversing some of these cuts would involve an increase in current spending, but that might be a price that needs to be paid to repair a fractured country.
Those concerned more generally with the prospects for the UK economy, particularly after reading the government’s gloomy Brexit analysis, may take the view that levels of government investment further need to be increased as well.
There are plenty of uncertainties surrounding the economy at present, but if the news on the public finances remains good over the coming months, Hammond is likely to face renewed and intense pressure to address these issues in the Autumn budget.