The Spring Budget may have been downgraded to a mere Statement – with all fiscal announcements reserved for the November Budget – but yesterday’s speech by the chancellor still gave some useful insights into what to expect during 2018.
So too did the revised forecasts from the Office for Budget Responsibility (OBR) that accompanied the Statement.
With the second half of 2017 showing stronger momentum for the UK economy, and outcomes for public finances also more positive than the OBR had pencilled in, some upward revisions were always on the cards. And improved numbers this spring will give the Philip Hammond more room for manoeuvre in November if the UK economy remains on course.
In the event, the OBR chose to make only a very minor increase to this year’s growth forecast, preferring instead to reserve judgment before taking the rise in productivity in the second half of 2017 as a sign of more lasting change.
OBR forecasts for public finances were more positive, with debt now expected to fall to 77.9 per cent of GDP by 2022-23.
UK public sector debt remains relatively high, and with interest rates gradually on the rise, it will become more expensive to finance.
High debt also puts the government in a more challenging position, should the economic environment deteriorate significantly. The chancellor would then have less room to act to prop up the economy, and so his prudent approach to spending is understandable.
The relatively strong economic environment, both in the UK and among the UK’s main trading partners, is likely to reassure the Bank of England in favour of a rate rise in May. We may even see another rise in November, if EU negotiations continue smoothly.
Some people may be disappointed that Hammond delayed all tax and spending decisions until November. However, by making these changes just once a year, he is providing more stability and certainty – which we know businesses value greatly.
It’s perfectly possible, of course, that things may change significantly over the coming months, and by November, Hammond could find himself in a very different environment. But, based on the messages we heard yesterday, we should expect further investment to improve productivity over the coming years.
That will put money in the right direction, but more will need to be done to raise UK productivity levels and secure a more prosperous future for people here. Investment in physical infrastructure is important, from transport and housing to the increasingly critical areas of artificial intelligence, blockchain, and other innovative technologies, where material efforts to continue to upgrade the UK’s mobile phone and broadband networks would be widely welcomed as a start.
Investment shouldn’t, however, be just about physical assets. The future lies in our people and talent. Businesses often mention the difficulties they face in implementing their investment in new technologies, because of a lack of the necessary skills. Investment in our education system is vital, focusing on STEM subjects (science, technology, engineering, and mathematics) without neglecting communication skills and creativity, which could prove in great demand in a world of self-learning machines.
Helping management fully reap the benefits of new technology within the companies they lead could also be a game-changer. The mixed productivity performance among UK companies across most sectors indicates a variable quality of management skills. Initiatives to boost those skills may help spur the UK’s average productivity and long-term growth.
It is also conceivable that we are experiencing something of a lull before we see the mass adoption of new technologies. This could in itself improve productivity and lead to higher growth than currently predicted by the OBR – giving the chancellor more room to act further down the line.
Whatever scope there is for Hammond to increase future spending, businesses will respond better if the direction is clear. Even given improved prospects for public finances, the chancellor cannot rely on government investment alone to boost the UK’s productivity.
Simplifying incentives and providing a stable business environment will go a long way towards encouraging higher levels of well-targeted business investment. It is improvements to business performance that will make the most difference to the future of the UK economy.