The Office for Budgetary Responsibility (OBR) has significantly upgraded the UK’s growth expectation for 2017, but Chancellor Philip Hammond has exercised caution ahead of Brexit with a prudent Budget.
Delivering the 2017 Spring Budget, the last in its current guise, Hammond announced that despite economic forecasts remaining broadly unchanged since the Autumn Statement, the OBR’s growth prediction for the UK this year had increased from 1.4% to 2%.
In fact, last year the British economy grew faster than the US, Japan and France with growth second only to Germany among the major advanced economies, he said.
However, the OBR has downgraded UK growth in subsequent years (2018 to 2020) to 1.6%, 1.7% and 1.9% before climbing back to 2% in 2021/22.
Hammond said this year’s outlook had been buoyed by a robust labour market. Since 2010, the employment rate had risen from 70.2% to 74.6%, currently at a record high, while unemployment was at an 11-year low.
But he held back from making any drastic changes to fiscal policy, a move many commentators believe was in order to keep his powder dry ahead of Brexit negotiations.
Hammond announced no increase to overall spending, saying we “will not saddle our children with ever-increasing debts”, despite the fact overall public sector net borrowing as a percentage of GDP is predicted to fall from 3.8% last year to 2.6% this year.
Royal London Asset Management economist Ian Kernohan said: “The Chancellor still has some room for extra borrowing, thanks to the new fiscal rules introduced last year. He has taken the decision to save this modest honey pot, in case the Brexit process causes a much larger than expected hit to economic growth.”
Faraday Research equity analyst Trevellyan Ward observed that Hammond had announced a fall in public sector net borrowing while at the same time ignored calls to ratchet up tax giveaways and/or spending commitments.
“Although this year’s, as well as the following’s growth forecast were upgraded by the OBR, this was neutralised by downgrades to the 2018-2021 growth forecasts,” he said.
Meanwhile, Schroders UK equities fund manager Sue Noffke said it was good to see the Chancellor exercising fiscal prudence even though the UK economy has performed robustly following the UK’s vote to leave the EU.
“It will also be reassuring that the Chancellor has opted not to increase spending despite borrowing coming in lower than expected, particularly if the Brexit talks prove particularly difficult and start to impact on economic growth,” she said.
