Budget 2018: Austerity killed off – if a Brexit horror show is avoided

The Chancellor hands out short-term Halloween treats for government departments, but the spectre of Brexit still looms large.

29 October 2018

Azad Zangana

Azad Zangana

Senior European Economist and Strategist

The 2018 Budget was brought forward this year to avoid a nightmare clash with the Brexit negotiations. It was clear from the Chancellor’s speech that he was keen to avoid a ghoulish backlash from any controversial announcements. Indeed, the majority of policy measures unearthed had been leaked to the press beforehand, leaving Philip Hammond with no tricks up his sleeve.

The independent Office for Budgetary Responsibility (OBR) updated its forecast in the usual manner, and downgraded real GDP growth for this year from 1.6% to 1.3%. The Chancellor skilfully neglected to mention 2018, and instead focused on the upgrades for 2019-2021. The inflation forecast was revised higher in almost every year, but the good news for households is that the forecast for wage growth in real terms is positive throughout the forecast.

Borrowing figures have been coming in lower-than-expected this year, providing the exchequer with an unexpected windfall of around £10.8 billion, compared to the updated March forecast (like-for-like).

Additional tightening this year puts the Chancellor £11.6 billion ahead in total, but in fiscal year 2019/20, fiscal giveaways will increase the level of annual borrowing as a share of GDP for the first time since 2009/10. Admittedly only by 0.2% of GDP, with borrowing then falling to reach 0.8% of GDP by 2023/24.

Is this really the end of austerity? Not in our view.

Hammond announced that he plans to increase departmental spending on average by 1.2% in real terms each year in the next spending review from next year. While this is a substantial swing compared to real-term cuts overall, the rate of increase is expected to be less than GDP growth, and so demands on public services will probably still outpace funding.

In terms of the policy changes, key announcements included:

  • The increase in the personal tax-free allowance to £12,500 from April 2019 (one year early), which will be welcomed. The higher rate tax threshold will also be increased to £50,000 at the same time.
  • A new revenues-based tax on internet giants is expected to raise £400 million a year. Moving ahead to introduce this tax before an international agreement is in place could be seen as targeting specific companies from certain countries, and could risk a backlash.
  • More money for NHS services, especially for mental health crisis services.
  • Additional funds for the government’s industrial and technology strategy.
  • Some help for small businesses with an increase in rates reliefs.
  • More funds for councils to spend on social care in England.
  • More funds to help smooth over the full roll-out of the unpopular universal tax credit system.

Overall, it is a modest budget at a time when the government is in a precarious position ahead of the big Brexit showdown. Extra spending in coming years will come as a relief for government departments, but with the deficit continuing to fall, the plans represent a fiscal giveaway compared to the previous forecast, but not in absolute terms.

The ghost of austerity is likely to haunt this government a little longer – at least until after Brexit, assuming a deal can be found.

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