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Spring Statement 2019: growth downgrade for 2019, but better public finances

Date: 18th March 2019

Spring Statement 2019: growth downgrade for 2019, but better public finances
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the Chancellor’s Spring Statement:
  • The OBR revised it GDP growth forecasts. The new forecasts were 1.2% for 2019 (1.6% in October 2018, upgraded from March 2018’s 1.3%), 1.4% for 2020 (unchanged), 1.6% for 2021 (from 1.4%), 1.6% for 2022 (from 1.5%) and 1.6% for 2023 (unchanged). The OBR assumed an orderly Brexit.
  • The OBR made further improvements to the fiscal forecasts, with Public Sector Net Borrowing (PSNB) projected at £22.8bn for FY2018 (compared with £25.5bn in October) and lower forecasts thereafter. The outlook for Public Sector Net Debt (PSND) also improved.
  • The OBR judged that the fiscal mandate (the structural budget deficit to be 2.0% of GDP in FY2020) would be met, with “headroom” of 1.2% of GDP (or £26.6bn). However, the forecast needed qualifying not least of all, because the ONS is changing the treatment of student loans, which could add £12bn (0.5% of GDP) to borrowing in FY2020.
  • The OBR judged that the Supplementary target (that the PSND/GDP ratio falls in FY2020) was also met.
  • The Chancellor discussed the Deal Dividend if the Withdrawal Agreement was agreed to. He said there would be an economic boost and the aforementioned “headroom” could be reduced, giving a fiscal boost.
  • There were few policy statements in the Spring Statement.
  • The tax/GDP ratio was modestly increased over much of the forecasting period, staying at around 34½% of GDP, the highest for nearly 50 years.
  • Additionally, the latest HMRC data show that the top income groups currently account for a larger share of the total tax take than 20 years ago.
Other economic developments include:
  • GDP recovered 0.5% (MOM) in January after December’s 0.4% (MOM) fall. GDP rose by 0.2% (QOQ) in the three months to January, to be 1.3% higher (YOY).
  • The trade data continue to disappoint. In the three months to January the total trade (goods & services) deficit widened by £1.3bn to £10.4bn.
On Brexit:
  • The Commons rejected the “deal” (Withdrawal Agreement and the Political Declaration) by “meaningful vote” for a second time. They also ruled out a No Deal Brexit (under any circumstances) and voted for an extension to the Article 50 negotiations (beyond 29 March 2019).
  • There will be a third “meaningful vote” on the “deal” by 20 March, ahead of the next European Summit (21-22 March).

Ruth Lea said, “The OBR’s forecasts for the public finances, encouragingly, showed further improvements. However, they should be treated with great caution. Forecasts for public sector borrowing, the difference between two very large numbers, are subject to significant forecasting errors in the best of times, Brexit uncertainties apart. The forecasts employ interest rate assumptions that risk being too low, resulting in Debt Interest forecasts which could materially be on the low side. And the ONS’s changed treatment of student loans could add £12bn to borrowing in FY2020, absorbing almost half the Government’s “headroom” for any future fiscal boost.”
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Arbuthnot Banking Group PLC:

Ruth Lea, Economic Adviser
07800 608 674, 020 8346 3482
Follow Ruth on Twitter @RuthLeaEcon

Sam Cartwright
020 7379 4415
Jais Mehaji
020 7379 5151