Fiscal Phil keeps room for Brexit

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Guide to key Budget announcements

Fiscal Phil keeps room for Brexit

The Chancellor put together the 2018 Budget knowing that he borrowed more than £5bn less in the 2017 to 2018 fiscal year than he thought he had at the time of the Spring Statement, and that borrowing between April and September in the current fiscal year was 35 per cent lower than during the same period last year – twice as a big a reduction as forecast. 

Uncharacteristically, he reallocated this windfall to future spending. So how much more is Philip Hammond forking out?

By the end of the current Parliament, the government will spend an additional £17.9bn while raising just an additional £280m in taxes. 

But remember, this is relative to the spending plans already set out. That’s crucial to assessing the validity of Mr Hammond’s proclamation that “austerity is coming to an end”. It is no more than rhetoric and the politically-neutral Office for Budget Responsibility's (OBR's) report tells a different story. 

At best, fiscal policy won’t be getting any more austere in 2019 to 2020, but the OBR’s numbers clearly show that the cyclically adjusted budget deficit will tighten again from 2020 to 2021. And that’s after eight long years of extraordinary fiscal tightening. As a result, we are not changing our outlook for the UK economy. Low growth and tight fiscal policy is here to stay.

The ‘giveaway’

Nevertheless, public sector net borrowing is likely to be 1.9 per cent of national income this year, back in line with the 70-year average, albeit still above the 1.3 per cent average seen during the Tony Blair years (1997 to 2007).

But a net giveaway Budget does not reverse eight years of austerity. Sure, total real spending has fallen by just 1.5 per cent from a peak of £800bn in 2010 to 2011, but this must be seen in the context of an increasing, aged population that requires more government services. In this context, eight years of cuts were deep and unprecedented. The average department’s budget was cut by 20 per cent.

All told, total public spending as a share of GDP has fallen from 45 per cent in 2009 to 2010 to 38 per cent, close to the US’s 36 per cent which has always been viewed as disconcertingly low.

Mr Hammond previewed the spending review by announcing that day-to-day spending limits will rise by an average of 1.2 per cent a year. However, the OBR clearly illustrates that real expenditure limits per capita will not rise at all once we exclude the NHS. Moreover, the government has discretely slashed the money set aside for long-term capital spending in the coming years. According to the OBR, the capital spending budget has been cut by £7bn per year in 2020 to 2021.

The fiscal rules

The chancellor delivered his net giveaway Budget while lowering the national debt to GDP ratio by 2020 to 2021 and keeping the structural deficit below 2 per cent of national income. But he had to jettison one of his fiscal rules and a manifesto pledge to run a fiscal surplus from the mid-2020s.