In his autumn Budget, Philip Hammond partially delivered on expectations that he would loosen fiscal policy. The chancellor announced a net fiscal giveaway of £5.8bn (0.3 per cent of GDP) for 2018-19 and £8.9bn for 2019-20, fading to just £1.95bn in 2020-21. The largest single element of the loosening in 2018-19 is an extra £2.3bn of NHS spending. He also allocated an extra £1.5bn for spending on preparations for Brexit. Cutting stamp duty for first-time buyers will cost the Exchequer £560m next year and freezing fuel and alcohol duties will cost another £1bn.
Despite this, overall fiscal policy will still tighten in coming years as a result of previously announced measures to curb public spending and replace tax credits with the less generous universal credit. The cyclically-adjusted primary budget balance (a measure of the fiscal stance) is projected to move from a deficit of 0.5 per cent of GDP this year to a surplus of 0.2 per cent in 2021-22.
Total government borrowing, however, has been revised up significantly. The Office for Budget Responsibility (OBR) now expects £58.8bn more public sector net borrowing between 2018 and 2022 than it predicted in the spring Budget. This, it said, is mainly because it has downgraded GDP forecasts – and hence projected tax revenues – because of “a significant downward revision to potential productivity growth”. It also warned that public spending cuts and “Brexit-related uncertainty” will “weigh on the economy” over the next two years. The OBR now expects real GDP to grow by only 5.6 per cent between 2017 and 2021, compared with the 7.5 per cent growth predicted in March. This is despite the fact that it slightly revised up its forecast for world GDP growth, which should have benefited projections for the UK.
These forecasts, however, are even more uncertain than usual. The OBR warned that there is “huge uncertainty” surrounding its productivity projections – having been consistently too optimistic about productivity since 2010, it’s possible that the OBR is now too pessimistic. The OBR also said it had “no meaningful basis” on which to form a judgment about the outcome of Brexit negotiations and their impact upon the economy.
Financial markets were largely unmoved by the Budget. The March 2018 long gilt future price actually rose very slightly, as the prospect of years more of sluggish growth offset the prospect of higher gilt supply. Interest rate futures prices were also unchanged, with markets continuing to price in a three-month interbank rate of 1.1 per cent for December 2019, a rise of 0.6 percentage points from its current level. Markets judged that a small and largely temporary fiscal loosening against the background of slower growth than previously expected will not be sufficient to materially raise interest rates.
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