Autumn Budget 2017 - the economy and public finances

The Chancellor of the Exchequer, Philip Hammond, presented his Autumn Budget on 22 November 2017.

In this, the first of five articles on the budget, we focus on the economy and public finances.

The economy

Growth – Forecasts for GDP growth in 2017 have been revised down to 1.5%, with cumulative GDP growth by 2022 expected to be 2.1 percentage points lower than forecast in the spring budget. Business investment growth remains moderate, at 2.5% in the year to Q2 2017. Export volumes have shown a small increase. Predictions for household consumption have been reduced. The current account deficit is expected to narrow to 4.6% in 2017.

Labour market – the employment rate has risen to 75% in the three months to September 2017, with the unemployment rate falling to 4.3%. Pay rose by 2.2% in the three months to September compared with the same period in the previous year, and the annual increase is expected to rise to 3.1% by 2022. Because of rising inflation, however, real household disposable income has fallen. Productivity remains subdued, forecast to rise to 1.3% by 2022, a reduction from the 1.7% increase forecast in the spring budget.

Prices – the consumer prices index (CPI) has risen from 0.9% in October 2016 to 3% in October 2017, the increase fuelled by the decline in the value of sterling. CPI is expected to fall to 2% by the end of 2018, and 2% is reaffirmed as the inflation target. The consumer prices index including owner-occupiers’ housing costs (CPIH) was 2.8%.

Public finances

Public borrowing – the government remains committed to reducing the cyclically adjusted deficit to below 2% of GDP by 2020–21, and is currently predicted to meet that target in 2018–19. While borrowing in the short term is expected to be lower than previously forecast, it is expected to be £12.2 billion higher by 2020–21, partly owing to a weaker economic outlook. The borrowing now predicted represents 1.5% of GDP, with public sector net debt forecast to be 83.1% of GDP in the same period. 

Welfare cap – spending within scope is forecast to be within the welfare cap and margin. The cap has now been reset for the new Parliament, with a margin of 3%; performance will be formally assessed in 2022–23.

Public spending – total managed expenditure is forecast to fall from 38.9% of GDP in 2017–18 to 37.7% in 2022–23. A further £3 billion is provided for Brexit preparations in the period to 2019–20. Official development assistance spending is to be reduced, reflecting lower forecasts for gross national income (GNI), in line with the commitment to spend 0.7% of GNI on overseas aid. While there have been some savings in low-value government spending, it has been decided not to make a further £1.1 billion reduction in spending in 2019–20; departmental spending in that year will be £2.1 billion higher than forecast in the 2016 budget.

Asset sales – the sale of shares in Lloyds Banking Group was completed on 16 May 2017, realising £21.2 billion for taxpayers, about £900 million more than the original investment. There are plans to sell some two thirds of the government stake in the Royal Bank of Scotland by 2022, realising about £15 billion. The sale of Bradford & Bingley mortgages will continue, with remaining assets from Bradford & Bingley and Northern Rock sold by March 2021. Other asset sales include the UK Green Investment Bank (to Macquarie Group Limited); the first tranche of the student loan book; and the leases for commercial spaces under railway arches, to be completed by autumn 2018.

For our other articles on the budget, see here.

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