A summary of Spring Statement 2019 and the Office for Budget Responsibility's forecasts for the economy and public finances.Jump to full report >>
The Chancellor of the Exchequer gave his Spring Statement 2019 to Parliament on 13 March and published a Written Ministerial Statement with further details. Once the Chancellor finished his speech the Office for Budget Responsibility (OBR) published updated forecasts in its Economic and Fiscal Outlook.
The Spring Statement was delivered at a time when Parliament’s focus was on the UK’s exit from the EU. On the previous evening, the Government lost its second ‘meaningful vote’ on the withdrawal deal. Somewhat unsurprisingly, in his speech the Chancellor regularly referred to the benefits of leaving the EU with a withdrawal deal.
The Chancellor spoke about the relative downsides of leaving without a deal highlighting the potential for “significant disruption in the short- and medium-term and a smaller, less prosperous economy in the long-term, than if we leave with a Deal”. He also said that, following a no deal departure, the Government would have to act with caution if it felt that the economy needing stimulating, in case such a response simply leads to inflation.
The Chancellor returned to a theme he has previously discussed: the Deal Dividend. If the UK leaves the EU with a deal including a transition to a future economic partnership, it is the view of the Chancellor that the UK will receive a Deal Dividend, “an economic boost from recovery in business confidence and investment” and a boost for the public finances with the Chancellor feeling freer to increase spending or reduce taxes once “the risk of a ‘no deal’ exit is removed”. The Library’s background briefing to Spring Statement 2019 discusses the ‘Deal Dividend’ further.
The Chancellor announced some details about Spending Review 2019 which depend on a Brexit deal being “agreed over the next few weeks”.
The Spending Review process – in which spending plans will be set for Government departments – will begin before Parliament’s summer recess and will cover a three-year period. The results of the review will be reported at Autumn Budget 2019.
The Chancellor made more policy announcements than expected, including:
A report on unlocking digital competition has been published by the Digital Competition Expert Panel, with proposals to boost competition and innovation for the benefit of consumers and businesses. Following this, the Chancellor has asked the Competition and Markets Authority to carry out a market study of the digital advertising market.
The Office for Budget Responsibility (OBR) published a new set of forecasts to which the Chancellor’s Spring Statement responded. The OBR’s previous set of forecasts were from October 2018.
All OBR forecasts assume that the UK leaves the EU on an orderly basis, including a transition period to the end of 2020 and then a smooth shift to a new long-term UK-EU relationship (which is not yet defined). The OBR stated that alternative outcomes, including a disorderly ‘no deal’ exit, remain the biggest short-term risk to the forecast.
The OBR revised down its forecast for GDP growth in 2019 from 1.6% to 1.2%, a result of growth weakening at the end of 2018 which is thought to have continued into early 2019. This was due to a slowing world economy and declining business investment in the UK (itself linked to Brexit uncertainty).
The OBR stated that the weakness seen in business investment at the end of last year was expected to “continue to weigh on business investment” in the near term. Over time, the OBR believes a modest boost from investment to GDP growth could be expected in future years if Brexit uncertainty dissipates. A weaker global economy is expected to lead to UK export growth being weaker than previously thought, acting as a drag on growth.
The GDP growth forecast for 2020 was left unchanged at 1.4%, while forecasts for later in the five-year forecast period were raised slightly: from 1.4% to 1.6% in 2021 and from 1.5% to 1.6% in 2022, with 2023 unchanged at 1.6%. The OBR’s overall average annual GDP growth forecast of 1.5% for 2019-2023 was the same as at the time of the Budget in October.
The OBR revised up its forecasts for average earnings growth, most notably for 2019. It now expects average earnings – not adjusted for inflation – to increase by 3.1% in 2019 compared with 2.5% in its previous October forecast. The OBR pointed to earnings growth being stronger in recent months than it had expected and forecast this “momentum” to be “maintained”.
The OBR published new public finance forecasts alongside the Spring Statement.
As discussed previously, the forecasts have been produced at a time of particular uncertainty, largely as a result of the Brexit process. The OBR’s forecasts assume that the UK leaves the EU in an orderly manner with a transition to a new long-term relationship.
The OBR forecasts that the Government will borrow £22.8 billion this year. By 2023/24, they expect borrowing to fall to £13.5 billion. Lower borrowing is forecast in every year of the five-year forecast period, compared with the OBR’s previous forecast (October 2018).
The improvement in the borrowing forecast is a result of revisions to the OBR’s underlying forecast, which take into account the latest data for the economy and public finances. The revisions decrease borrowing by around £6 billion a year on average, while Government decisions taken since October 2018 increase borrowing by around £1 billion a year.
The revisions to the OBR’s underlying forecast were largely a result of higher income tax receipts and lower spending on debt interest.
The Office for National Statistics (ONS) is changing the way it accounts for student loans. The accounting change, which is expected to be in force by September, aims to ensure that the treatment of the loans better reflects how they work in practice and is likely to have a relatively significant impact on borrowing figures in the short- to medium-term.
The OBR have estimated that the change could result in borrowing being £10.5 billion higher in 2018/19, rising to £13.7 billion higher in 2023/24.
It is important to say that nothing real has changed to the way the loans work. This is all about how the loans are accounted for in Government borrowing – the change ensures that the losses expected on the loans are recognised when they are issued, rather than in 30 years’ time when they are written off. The change has no direct impact on government debt.
The Library Insight Student loans: ONS changes accounting rules has more on the change.
The OBR forecasts that the debt-to-GDP ratio will be 83.3% at the end of 2018/19. It expects the ratio to fall each year and forecast that debt will be equivalent to 73.0% of GDP in 2023/24.
The OBR’s forecast for the debt-to-GDP ratio is lower in all years than was forecast in October 2018. The improvement is largely a result of lower forecasted borrowing over the period. Nominal GDP is also forecast to be a little larger, compared with the previous forecast, which reduces the debt-to-GDP ratio slightly from 2020/21 onwards.
The OBR believes the Government is on course to meet its targets covering public sector borrowing, debt and welfare spending.
The OBR says that meeting the Government’s overall objective for the public finances – reaching a budget surplus by the middle of the 2020s – appears challenging.
Commons Briefing papers CBP-8524
Authors: Matthew Keep; Daniel Harari; Chris Rhodes