In this blog we comment on the OBR forecasts and the picture that they paint for the economy in the coming years, as well as on the main Spring Statement headlines and any implications for Wales. The ‘big’ news was the slightly upwardly revised OBR economic forecasts compared to the previous November forecasts. There were no big fiscal decisions announced at the Spring Statement, in line with the decision to move towards one single event a year, although the Welsh Government will get a small consequential of £24m as a result of funds to help departments respond to Brexit having been allocated across different departments. The Chancellor suggested that if the economic indicators continue to improve, there may be some extra funding for public services at the Autumn Budget 2018. The longer-term overall path for public services spending will be set at the Spending Review 2019 (covering the period 2020-21 onward), the spending envelope for which will also be set out at the Autumn Budget 2018. Austerity may ease, but is far from over, and big questions about future levels of tax and spend have gone unasked. We will have to wait and see what the future fiscal decisions might be.
Marginal improvements in OBR forecasts on November 2017,
but longer-term outlook subdued
Economic growth is forecast to be slightly better in 2018 than in the OBR’s previous Economic and Fiscal Outlook (EFO) forecast but the news on growth is otherwise downbeat. After 2018, it will dip slightly, before returning to 1.5% in 2022, marginally below the November 2017 forecast of 1.6% for the same year, and below long-term annual trend growth of 2% minimum. In addition, UK performance compared to the other G7 countries deteriorated over the last two years, with the UK going from being one of the fastest-growing economies in 2016 to one of the slowest in 2017.
Current budget revenues and spending have more or less come into balance, and the current budget balance is projected to show a small surplus in 2018-19. The deficit as a whole (including capital spending) will continue to fall as a proportion of GDP and in absolute terms, from 2.2% of GDP in 2017-18 (£45.2bn) to 0.9% of GDP in 2022-23 (£21.4bn). However, while the scale of deficit reduction is marginally better than the November 2017 forecast, compared to March 2016, the deficit is still much higher. It now looks as though it will take until the mid-2020s to eradicate and that may depend of some difficult decisions and choices.
Debt, as a percentage of GDP, is presently around a third higher than 2009-10, and around double pre-crisis levels. It is forecast to fall in every year of the Parliament, from 85.6% of GDP in 2017-18 to 77.9% in 2022-23, and marginally better than November 2017 forecasts. But, according to the IFS, once the Bank of England transactions are taken out, debt will remain fairly flat as a proportion of GDP from 2019 onwards – partly as a result of weaker growth, and partly due to student loans accounting (shift from deficit to debt).
Overall, while March 2018 Economic and Fiscal Outlook (EFO) provided marginally better forecasts compared to the November 2017 EFO, they were still substantially worse than the pre-referendum March 2016 EFO, and below pre-crisis forecasts, with substantial implications for living standards and public services.
On Brexit, little was mentioned in the Spring Statement, other than that the £1.5bn of Brexit preparation funding for 2018-19 committed at the Autumn Budget 2017 has now been allocated to departments. The Welsh Government will get a small consequential of £24.1m as a result of these allocations.
As there is still considerable uncertainty about how the Government may respond during Brexit negotiations, the broad OBR Brexit assumptions used in its EFOs following the referendum are still in place. In the present EFO, however, the OBR has been able to factor in the cost of the ‘divorce bill’ onto what the UK would continue paying to the EU and what the UK could recycle into other spending instead. The estimated cost of the divorce bill totals £37.1bn (in the middle of the Treasury’s estimates of £35-39bn). The bill will be incurred between 2019 to 2064, with three-quarters of the cost (£28bn) incurring by 2022-23. The OBR also highlighted that the wider economic effects of Brexit would likely be greater than any direct effects through the cost of the divorce bill and related expenses, however.
Furthermore, as the UK Government has set out commitments to maintain certain activities currently funded by the EU or to provide similar activities, not all of the ‘assumed spending in lieu of EU transfers’ would actually be ‘free cash’. Little detail about the funding arrangements of such commitments is available at present (the commitments that the OBR commented on added up to around £7bn in 2016), and any post-Brexit spending decision announcements are expected at the 2019 Spending Review.
Public sector pay
We are still none the wiser about whether any new funds would be made available to fund pay increases on top of the now-lifted 1% public sector pay cap, or whether the pay rises would have to be met from the existing settlement. The Chancellor mentioned the pay modernisation deal for Nurses and Agenda for Change staff, but again, it was unclear whether this would be funded through existing or additional funds. Nothing has been said about funding pay rises in other public sectors. The Welsh Government has said previously that a 1% increase to devolved public sector pay would cost the Welsh Budget an additional £100m.
Investment and infrastructure
As part of the summary of investment in infrastructure, the Chancellor confirmed that negotiations were being carried out for the North Wales and Mid Wales city deal projects, among others.
It may be interesting to see how a new measure of human capital will be developed. The ONS will be looking into such a measure to better evaluate the return on investment in people’s skills.
Plastics and environment
The UK Government has opened a consultation on how best to use taxes to encourage behavioural change and using plastics responsibly. Furthermore, £20m from existing departmental budgets (not new money) will be earmarked for research on reducing the environmental impact of plastics. The results of the consolation and research may be of interest to the Welsh Government, as it is exploring a Welsh tax on disposable plastics.
Overall, the Spring Statement 2018 suggests that existing spending plans to 2020 remain in place for now and that austerity is not over. The Chancellor may, however, use some of the extra headroom from the slightly improved OBR forecasts to fund spending increases in the Autumn Budget. Furthermore, the Spending Review 2019 will set out the main direction for public services funding in 2020 and beyond. In the immediate term, austerity and welfare cuts continue, and no big change to Welsh Budget has occurred.
The levels of tax and spend are political as well as economic decisions. Eight years of austerity is taking its toll on key public services such as NHS, schools and local government. Keeping public spending at the current fraction of national income as well as eliminating the deficit could mean significant tax increases (or spending cuts) over the medium term. It is not clear how long the current approach can last – as Paul Johnson mentioned in a recent interview with the Guardian, “You can’t have European standards of welfare with American-style tax levels. You have to make a choice.”
We will be revisiting our budgetary trade-offs paper to see just what some of the choices facing the Welsh Government are, in light of more recent budget figures and spending data. We will also have to wait until the Autumn Budget to see what, if any, additional spending will come, and how much more austerity lies in store for public services.
Dr Daria Luchinskaya
Research Associate, Wales Public Services 2025
 See https://www.parliament.uk/business/publications/written-questions-answers-statements/written-statement/Commons/2018-03-13/HCWS540/ for more information about departmental allocations and about consequentials to other devolved nations.
 The priorities mentioned in the EFO March 2018 were: Farm support, the Shared Prosperity Fund, Replacement of Official Development Assistance (ODA) funds, Science and education (e.g. access to Erasmus, Creative Europe, and Horizon2020), and maintaining membership of some regulatory agencies.