Comment: Chancellor’s ‘game-changer’ depends on more

Bill Jamieson. Picture: Ian Rutherford
Bill Jamieson. Picture: Ian Rutherford
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PLUS ça change, plus c’est la même chose: after a Budget described as radical, far-reaching and game-changing we might fairly assume that the fiscal landscape across the UK has changed substantially. But it is always instructive to look at the figures in the Budget Red Book before rushing to endorse the numbers singled out for public attention.

Here is what they show. In a Budget claiming to reduce the role of the government in everyday life, total managed expenditure continues its inexorable rise, from £742.3 billion in 2015-16 to £844.5bn by 2120-21, an increase of £102bn or 14 per cent. Within this total, public sector current spending rises by more than £89bn to £675bn.

Despite the political controversy over benefit caps, overall welfare spending is forecast to rise from £214.3bn this year to £227.3bn in 2020-21. Public sector net debt will continue to rise, from £1.53 trillion currently to £1.62 trillion in 2018-19, dipping slightly the following year but rising further to £1.63 trillion in 2020-21. Did someone say “austerity”?

I cite these figures to emphasise two points. The first is the critical dependence of government on the ability of the economy to keep growing. The second is that the public expenditure constraint envisaged in the pre-election Budget just three months ago for 2016-17 has eased considerably (helped by total receipts up by £38bn on the preceding year) and that the medium-term profile of adjustment is now much smoother than before.

It is said that Scotland has been adversely hit by the Budget. Stewart Hosie, the SNP’s finance spokesman at Westminster, dubbed it “a bad Budget for Scotland”. But do the figures bear this out?

Previous forecasts by the Office for Budget Responsibility implied a reduction in the Scottish budget of around £3bn between 2015-16 and 2018-19. But as a post-Budget paper from Fiscal Affairs Scotland noted last week, recent analysis by the Scottish Government, based on IFS analysis that incorporated £12bn of benefits cuts rather than DEL cuts, suggested a reduction over the same period of almost £2bn.

Now the current OBR forecast implies a reduction in the Scottish budget of close to £1bn between 2015-16 and 2019-20.

The detailed Barnett consequentials of the spending plans will not be known until after the Autumn Spending Review. But on the indications thus far it hardly justifies the rhetoric of “draconian cuts”.

Of greater importance, of course, is how the Budget will affect business investment and expansion. Here reaction has been mixed. Martin Bell, tax partner at BDO, says the Budget “largely bypassed medium-sized businesses, the backbone of the Scottish economy”. The reduction in the headline rate of corporation tax to 19 per cent next year and 18 per cent by 2020 (remember that the main rate was 52 per cent in 1983 and was still at 30 per cent eight years ago), the rise in the NIC employment allowance from £2,000 to £3,000 and the increase in the annual investment allowance for plant and machinery set at a long-term level of £200,000 per annum have been widely welcomed. But against these gains are the introduction of the national living wage which may hit small businesses.

How is the economy overall likely to perform over the coming period? OBR forecasts indicate a fractional dip in growth from 2.4 per cent this year to 2.3 per cent next, picking up to 2.4 per cent in 2018 and beyond. Oxford Economics believes this to be unduly pessimistic, given the likely boost to activity and spending elsewhere from the collapse in the oil price. This criticism, it says, still stands.

For Scotland, current independent forecasts are lower. Inverness-based Mackay Consultants is projecting 2.4 per cent growth for this year, dipping to 2.2 per cent in 2016 and 2017, due in large part to the adverse impact of lower oil prices. The widely quoted Fraser of Allander Institute is forecasting 2.3 per cent for next year and 2017. And Ernst & Young remains the most pessimistic of all, seeing growth of just 2.3 per cent in 2016 with a subsequent slowdown to 2.1 per cent in 2017.

Two factors would suggest caution. The first is a highly uncertain international outlook, with a China slowdown of particular concern in the wake of sharp falls in the country’s stock market. And while a deal of sorts may be patched up this weekend between Greece and its creditors, the Eurozone as a whole is likely to see only muted growth over several years.

At home, the effect of caps on welfare allowances could see a dampening of household spending over the next 18 months.

Meanwhile, current pointers are mixed. Construction output across the UK fell by 1.3 per cent in May, led by a 5.8 per cent month-on-month decline in house building. Indeed, construction output may have fallen over the second quarter overall, adding urgency to the government’s push to free up planning controls.

More encouraging is that the trade deficit fell sharply to a near two-year low of just £393 million. However, the figures hardly suggest the beginning of an export surge: the better numbers for May owed much to a 3.2 per cent fall in total imports. As Global Insight economist Howard Archer points out, exports of traded goods excluding oil dipped 2.3 per cent month-on-month in May while exports of services only eked out a gain of 0.2 per cent.

Investment and expansion overall would have been more effectively boosted by reductions in business taxes elsewhere. One dog that didn’t bark was the government’s mooted reform of business rates that could have significant knock-on effects here.

However, we have at present an economy set for a modest rate of growth and a perceived measure of continuing stable expansion. Employment is forecast to rise by 900,000 over the years to 2020, average earnings climbing at an annual rate of 4.1 per cent in 2019, and productivity to rise from 0.9 per cent an hour to a rate of between 2.2 per cent and 2.4 per cent in 2017-2020.

It all seems as reassuring as those legislative commitments to a permanent budget balance. But, as with all such projections, we have to assume “plus c’est la même chose” will persist undisturbed for the duration. It rarely does. «