What are you to do when you are obliged to give a performance without your usual props? Yesterday Philip Hammond delivered what you might term a Budget-lite, without either a Red Book or the usual red box. Moreover, as he had warned in advance, there were next to no substantive measures. Yet he felt he had to do something more than just act as the mouthpiece for the Office for Budget Responsibility (OBR) in delivering its most recent forecasts.
He dealt with this problem in three ways: first, he made much of measures that had been announced and enacted before; second, he talked about various studies of possible measures soon to be undertaken; and third he hinted at a period of largesse to come.
In common with recent Budget speeches, the Chancellor indulged in some virtue signalling with regard to environmental issues. He set himself up to be the champion of a future initiative to reduce the quantity of plastic waste. This follows a distinguished tradition. Do you remember John Major’s “traffic cones hotline”? And this is good stuff; but not the stuff to make a Chancellor’s reputation, nor to win an election. That surely depends upon the economy and the public finances.
In that regard, as we expected, the OBR had a starring role in this production. But it did not exactly sparkle. At first sight, the revisions from its previous November forecast were indeed positive, but the amounts were hardly large enough to set the pulse racing.
Whereas last November it foresaw growth this year hitting 1.4pc, it now reckons the number may be 1.5pc. Whoopee! Given the extent of mismeasurement in the economy, this upgrade is equivalent to a slip of the statistician’s pen. Equally, after low recent monthly figures on public borrowing, the forecast improvement in this year’s budget deficit, at £4.7bn, was about the smallest that could plausibly be conceded.
GDP growth has been revised up in the Spring Statement Most strikingly of all, improvements to the short-term outlook were offset by downgrades to future progress. So, far from conceding that the outlook now looks much brighter than it did in November, the OBR’s forecast for the level of real GDP in 2022 is exactly the same as it was in November. All that has changed is the profile between now and then.
The same applies to productivity. The OBR has made no changes to its view about where productivity will be at the start of 2023.
So faster productivity growth in the last two quarters is offset by slower productivity growth over the next few years. Similarly for the public finances. They are better now than in the previous forecast but the improvement does not last. In 2020-21, the cyclically adjusted budget is exactly the same as it was in the November forecast.
The OBR is in danger of becoming the Remainers’ poster boy for Brexit pessimism. In the past, that seems to have been the Chancellor’s inclination anyway.
But not yesterday. The OBR’s po-faced caution put the Chancellor in a difficult position. He dealt with it by appearing much more upbeat in his speech than was consistent with the OBR’s numbers. This is exactly the right thing to do.
Given recent history, the fact that debt is now falling is momentousAs we all know, the record of economic forecasters is pretty grim and the OBR is yet to acquire distinguished status even among this peer group. The momentum in recent official economic figures and a welter of anecdotal evidence suggests that the economy is doing pretty well.
I suspect that the OBR is substantially underestimating the likely future strength of both investment and consumer spending. I expect the economy to grow this year by about 2pc and to continue at this rate for the next few years. That would improve the public finances considerably.
Even on the OBR’s more pessimistic view, it was particularly cheering to hear from Hammond that public debt is now falling. Of course, the Government is still running a deficit, albeit now only at about 2pc of GDP, down from 10pc in 2010. Accordingly, the absolute amount of debt is still rising. As a share of GDP, though, it is falling from this year onwards.
The UK’s current account deficit is no more. The progress made on debt may not seem remarkable, and things would certainly be more comfortable if the debt ratio were much lower. But, given recent history, the fact that it is now falling is momentous. Gradually working the debt down as a share of GDP is exactly how we reduced the debt burden in the 19th century and, helped by inflation, again after the Second World War.
As long as financial markets are confident that it will be falling in future years they can stomach debt being too high currently. They are pretty confident of that now – as long as Jeremy Corbyn and that nice Mr McDonnell are not in charge of the nation’s finances.
Unless that transpires, or some severe shock is imposed on us from outside, I believe that the Chancellor, whoever that is, will soon have the scope to achieve the golden triad – increases in public spending, reductions in tax rates and lower borrowing. Assuming that the OBR is still there to pronounce on it, I wonder what it will say to spoil the party. And, assuming that they are still there to pronounce on it, I wonder what Corbyn and that nice Mr McDonnell will have to say too.