Spring forward
Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.
Some sections of the media it seems cannot stomach good news. Last week Chancellor Philip Hammond revealed that debt as a percentage of GDP is expected to keep falling and he added that the reductions being obtained represent “a turning point in the nation’s recovery from the financial crisis of a decade ago”. The FT on the other hand decided to run with the gloomy headline, ‘Scant fiscal cheer amid Britain’s Brexit gloom’.
UK HBOS House Price Earning Ratio (monthly)
Source: Bloomberg, 2018
Tax revenues from self-employed workers are £2.9bn higher than predicted, allowing the UK to borrow less. Forecasts for growth and debt to GDP are improving and in the UK we have the smallest budget deficit since 2002.
Mr Hammond, known for his cautious approach, continues to believe that the national debt is too high and that it would be wrong to put “every penny” into more public spending. Nevertheless, he did speak of the potential for further “public spending and investment in the years ahead”, provided public finances by the autumn continue to reflect current improvements.
Sometimes it is instructive to look back at past expectations to give an insight into the way expectations are being formulated considering new information. In November 2017 the Office for Budget Responsibility (OBR) predicted that growth would slow in 2018 to 1.4%. They have now nudged this up slightly to 1.5% but forecasts for 2019 and 2020 were left unchanged at 1.3%.
While austerity measures are coming to an end, the opportunity to spend more is being calibrated with the official forecasts for growth which remains disappointingly low. However, forecasts are there to be beaten.
Talk of Brexit was relatively low key in Hammond’s statement but it referenced that “our economy does face uncertainty as we go through the negotiation process with the EU”. Thankfully, the estimated divorce bill set at £37bn by the OBR is not overly disturbing. If correct, and spread over many years (estimated out to 2064), this should be absorbed with ease if payments can be traded for preferential access and rights. If Mr Hammond meets his aim of borrowing no more than 2% of national income in 2020-21, there is scope for increased spending while simultaneously continuing to reduce national debt. The estimated amount of surplus that he could spend on services is an additional £16bn.
