There is now just one Budget a year in the United Kingdom, which takes place in the autumn, and in the spring we have a Statement, which contains no new fiscal policy measures, but instead provides an update on the progress of the economy in the light of the forecasts published simultaneously by the Office for Budget Responsibility.
The Chancellor painted a cautiously optimistic picture of the economy in his Statement, with moderate rates of growth, inflation returning to target, high employment and the public debt to GDP ratio peaking this year and then resuming a downward path. However, it is fairly clear that austerity will not be ending any time soon.
The report does contain some estimates of the fiscal consequences of our exiting the EU. It is forecast that for a number of years post exit, payments of approximately the same magnitude as at present will be made to the EU (the divorce bill), with it being well into the 2020s before there is any significant reduction in our payments.
Public debt is forecast to decline, but private debt is expected to rise. That continued growth of the economy may depend on consumers getting deeper into debt is worrying.
There is little reason to believe that the economy will do much better than forecast by the OBR, although it is just conceivable that we might see an improvement in productivity greater than the extremely modest increase expected by the OBR.
But there are a number of downside risks to the economy, including the following:
- Donald Trump’s decision to impose tariffs on US steel and aluminium imports may provoke retaliation and further escalation. If this happens, negative economic consequences for the world economy (and hence the UK economy) are to be expected.
- The outcome of the Brexit talks remain unclear. A bad deal might well lower trend growth in the UK economy.
- Domestic interest rates have been extremely low for about a decade, and are forecast to rise only gradually over the next few years. If they rise more quickly the cost of servicing the public debt would rise significantly, and this could scupper the chances of the Chancellor meeting his fiscal targets.
- Politically the government is not in a strong position. Theresa May is forced to rely on the DUP in the House of Commons. She is vulnerable to dissenters on both wings of her party. The possibilities of a leadership change or a general election, either of which would have unfathomable consequences, cannot be ruled out. Such political instability does no favours to the economy.