Whether the economy flops depends more on politics than economics. If the markets expect a Corbyn victory they will sell sterling assets and the pound, whatever Hammond does
We said in the Autumn that although we roughly agreed with the Chancellor’s forecasts, he was at risk if one of three problems emerged: market panic; slower international growth or a more messy than expected Brexit.
So far he has got away with it and in fact the sums look a fair bit more relaxed. The Treasury’s stealth taxes are now producing revenues on a rather stronger scale than expected giving the Chancellor an extra £5 billion a year in revenues over the past year. And growth is looking steady on the back of a strong world economy. Today’s remarkably strong John Lewis sales figures suggest that the economy has more than shrugged off the Beast from the East. This resulted in a marginal adjustment in the borrowing outlook. Compared to the Autumn Budget, Mr Hammond expects to borrow slightly less over the next years.
The emergence of greater than expected tax receipts has reinvigorated the calls for increased public spending. As we observed a while ago, the public has got austerity fatigue despite not really having had austerity. The OECD data (which tends to be more consistent than the government’s own) shows that over the past ten years (in other words taking out the swing during the financial crisis) public spending as a share of GDP has moved from 41.1% in 2007 to 40.5% last year.
In normal language a 0.6% change cannot realistically be called austerity. It is perfectly true that some budgets have been cut sharply (especially those of local authorities and defence) and others have risen by less than those working in the area would have liked. But that is different from a sharp cut public spending as a share of GDP of the kind that Mrs Thatcher achieved. Indeed, the present government plans that in the future public spending will largely grow with GDP with only marginal fall in the share planned to 2022/23.
The government has revised up its growth forecasts only very slightly and has argued that it believes the recent stronger productivity figures and tax revenue figures are only temporary. This looks highly prudent. It means that if the risks outlined in the first paragraph do not materialise, there will be money available within target for traditional pre election handouts. But actually, as was implied in the Chancellor’s speech when he spent more time attacking Labour than promoting his own policies, in the current world politics matters more than economics. If the markets believe that the Tories will win reelection, they will back the plans. If they think that Jeremy Corbyn might become Prime Minister, it is hard to envisage any Budget that could prevent investors selling sterling and UK assets and creating an economic crisis.
Contact: Douglas McWilliams
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