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Matthew Whittaker slides for pre-Spring 2017 Budget event


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Economy drive: prospects and priorities ahead of the Spring Budget.

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Matthew Whittaker slides for pre-Spring 2017 Budget event

  1. 1. Economy Drive Prospects and priorities ahead of the Spring Budget Pre-Budget Event Matt Whittaker February 2017 @MattWhittakerRF @resfoundation 1
  2. 2. THE PUBLIC FINANCE OUTLOOK 2 Some rare good news ahead
  3. 3. Borrowing has come in lower in the first ten months of 2016-17 than the OBR thought back in November 3 Implication is that PSNB will be ~£56bn in 2016-17, some £12bn lower than the OBR forecast at AS16 Improvement reflects revisions in the first half of the year, methodological changes and higher- than-expected receipts in recent months Source: ONS, Public Sector Finances
  4. 4. Looking across consistent six-year forecasts, theOBR has presented revisions ranging from a £78bn improvement at AS13 to a £119 billion deterioration at AS11 Subsequent policy measures have been more likely to increase rather than lower the borrowing forecast Borrowing forecast revisions have averaged £45.5bn across the OBR’s first 14 fiscal outlooks 4 Source: RF modelling & OBR, Economic and fiscal outlook, various
  5. 5. Adding the potential £12bn improvement in 2016-17 to more modest gains in subsequent years, we estimate an overall forecast reduction of £29bn in cumulative terms Next week’s revision is likely to be more modest, but should provide the first reduction in the borrowing forecast for three years 5 Source: RF modelling & OBR, Economic and fiscal outlook, various
  6. 6. TheAS16 projections implied that PSNB would still be 0.7% of GDP (or £17bn) in the first year of the next parliament The Chancellor introduced a loosely-defined “objective for fiscal policy” at Autumn Statement 2016 6 Source: RF modelling & OBR, Economic and fiscal outlook, various
  7. 7. With the output gap projected to disappear by 2020-21, the cyclically-adjusted net borrowing figures are expected to broadly match PSNB by the end of the forecast horizon Provided headroom of £27 billion in 2020-21 below conceptual ceiling And a more explicit, but loosely-fitting, “mandate for fiscal policy” that specified structural borrowing falling below 2% of GDP by 2020-21 7 Source: RF modelling & OBR, Economic and fiscal outlook, various
  8. 8. The implied revision is significantly bigger in 2016-17 than in the other years of the forecast.This reflects acknowledgement of better-than-expected public finance performance in the current year but continued expectations of a slowdown relative to the pre-referendum picture in future years A modest improvement in the borrowing forecast would increase the level of fiscal headroom to £31 billion in 2020-21 8 Source: RF modelling & OBR, Economic and fiscal outlook, various
  9. 9. • A revision of £29 billion would still leave borrowing significantly higher than was forecast 12 months ago – and deficit above pre-crisis norm for three more years • Continued economic and fiscal uncertainty cautions against any overreaction • The Chancellor made the right call ‘looking through’ the £100 billion deterioration laid out by the OBR at Autumn Statement 2016, he should take a similarly cautious approach this time round • But that’s not to say that he should do nothing: can reprioritise to deal with large structural problems Despite the good news, the public finance position remains incredibly tough 9
  10. 10. GOING ON AN ECONOMY DRIVE 10 Rebalancing UK growth
  11. 11. Following previous downturns,GDP per capita growth has subsequently grown above trend in order to ‘catch up’ some of the lost years What goes down usually goes up 11 Source: ONS, National Accounts
  12. 12. Following previous downturns,GDP per capita growth has subsequently grown above trend in order to ‘catch up’ some of the lost years That rebound has been absent this time around, leaving a ‘permanent hit’ to annualised GDP per capita of £5,700 But this time round, the economic recovery has lacked any bounce 12 Source: ONS, National Accounts
  13. 13. In 2016, consumption accounted for more than 100% of overall growth in GDP per capita And has been too reliant on private consumption growth 13 Source: ONS, National Accounts
  14. 14. Incomes have grown relatively strongly in recent years, helped by ultra-low inflation and employment growth, but the ‘mini-boom’ appears to have ended With a potential earnings squeeze coming in 2017, growth might depend on the saving ratio dropping further into the negative Which raises questions of sustainability in a period in which income growth is set to slow 14 Source: ONS, National Accounts
  15. 15. Fixed capital formation (covering private and public sector investment) has fallen from 23% of GDP in the mid-1970s to just under 17% today 1 in 3 firms admit to under-investing in last five years, citing barriers including uncertainty, access to finance and short- termism The flipside of over-reliance on consumption is a structural decline in investment 15 Source: ONS, National Accounts
  16. 16. The latest outturn for productivity is broadly in line with where the OBR thought it would be in 2011 back at Autumn Statement 2010 The OBR has now downgraded its assessment of trend productivity growth – implying a permanently lower trajectory While productivity performance continues to disappoint 16 Source: OBR, Economic and fiscal outlook, various
  17. 17. Tax cuts are set to cost ~£45bn by 2021-22, more than three times the size of the projected deficit that year The proportion of the population paying income tax has fallen from 53% to 46% since 2007-08 Lower NI receipts associated with self- employment is set to cost HMT £6.7bn by 2020-21 UK tax policy is also ripe for reform, with the tax-base narrowing and failing to keep pace with changes in the labour market 17 Source: OBR, Economic and fiscal outlook, various
  18. 18. Income growth fitting this profile would produce an unprecedented combination of falling incomes in the bottom half and rising inequality Overall income growth was lower in the last parliament, but inequality fell Inequality increased more rapidly in the 1980s, but incomes rose As things stand, incomes are set to fall in the bottom half of the distribution between 2016 and 2020, driving inequality higher 18 Source: RF modelling
  19. 19. Benefit modelling includes: reversal of UC work allowance and family element cuts, removal of two-child cap; reversal of freeze in the value of working-age benefits in 2018-19 and 2019-20 (we assume 2017-18 is already in place); and reversal of the benefit cap and age- limitation on Housing Benefit Reversing the benefit cuts inherited from the last government would help to flatten the growth curve 19 Source: RF modelling
  20. 20. Securing the same pace of employment growth as in the last parliament, combined with a fall in average housing costs, would boost incomes – in quite a progressive way More difficult given existing high levels of employment, but policy can help Pushing the income growth curve up requires policies focused on driving employment and productivity growth 20 Source: RF modelling
  21. 21. Adding in stronger wage growth would produce an overall income growth curve that gets closer to the average annual growth recorded during the late- 1990s and early-2000s period of strong, shared growth Pushing the income growth curve up requires policies focused on driving employment and productivity growth 21 Source: RF modelling
  22. 22. • Despite expected improvement in public finance outlook, we shouldn’t expect any major giveaways – though quite likely to see some funds for social care • But the Chancellor should reprioritise within his existing envelope to do more to support those on low to middle incomes, avoiding an unprecedented living standards squeeze • He also has the opportunity to build on plans for reform of corporate governance and industrial strategy in order to tackle long-standing problems • With two Budgets this year, there is a clear opportunity for setting strong sense of direction and purpose that will inform the rest of the parliament The Chancellor can aim for a Budget that is both short on rabbits but high on radicalism 22