A political attack and forecasts that may have fallen short of ministers’ expectation

Commentary John Mclaren

Phillip Hammond lived up to his promise to downgrade the traditional Spring Budget to a simple Statement on the UK’S public finances. As a result his short speech was largely a political attack on the Labour Party’s alternative approach. What was left of interest was the updating by the Office for Budget Responsibility (OBR) of its UK economic and fiscal forecasts.

Here the news for the UK government was not as good as they might have hoped for. The strong growth in productivity over the last two quarters has been ignored for now, as it is thought to be largely a statistical blip, akin to a similar, short lived, improvement seen in 2011. That means no revision up for now of future economic growth. What Hammond will hope is that the productivity improvements prove more long lasting so that the OBR may change its mind in November.

The other improvement of late has been in UK tax receipts, especially in relation to Income Tax, National Insurance Contributions and Corporation Tax.

However, public expenditure also rose, in part due to rising interest payments in relation to the national debt. As a result there was little in the way of an improvement in the profile for public sector net borrowing, which remains at a higher level than was forecast a year ago.

Meanwhile the elephant in the room remains recumbent. The OBR has to base its forecasts on the UK government’s stated policies and with respect to the post-brexit landscape these remain vague, or as the OBR puts it “in the absence of a meaningful basis to predict the precise outcome of the current negotiations with the EU, our forecasts continue to reflect provisional broad-brush adjustments”.

More than anything else, future fiscal forecasts will be shaped by these negotiations.

The Spring Statement had no direct effect on Scottish finances. However, the on-going discussion on whether or not productivity growth returns is highly pertinent.

At present the Scottish Fiscal Commission, whose role in Scotland resembles that of the OBR at the UK level, forecast Scottish productivity growth to be even poorer than seen for the UK, and even then they may be being overly optimistic.

Both governments need to try to work out a way to reinvigorate productivity growth or they will continue to struggle with lower than expected tax revenues, in turn putting pressure on budgets. ● John Mclaren, Scottish Trends Website