The first few months of Philip Hammond’s reign as Chancellor have been nothing if not eventful.
The former foreign secretary has had little opportunity to ease himself into the top job at the Treasury while grappling with the impact of momentous global events on a just-about-managing British economy.
Those inflation concerns are set to be the biggest economic headache
Last November’s lacklustre Autumn Statement illustrated the extent of the challenges facing a cash-strapped administration hurtling towards an uncertain future outside of the European Union. Yet, defiantly, and unexpectedly, the domestic economy has been performing pretty resiliently, despite those economic headwinds and lashings of austerity.
The Chancellor’s smile may broaden further this week when revised figures are released for gross domestic product (GDP) during the closing months of 2016. Economists suggest that a preliminary reading of 0.6 per cent quarter-on-quarter growth could be tweaked a tad higher, largely due to industrial production and construction output both being stronger than previously estimated.
Meanwhile, details of the expenditure side of GDP in the fourth quarter are likely to show that growth was again supported by robust consumer spending. It seems that through thick and thin, the bargain-hunting British shopper just cannot stay away from the high street (or their smartphones and PCs, with 15 per cent of sales these days generated online).
In little more than two weeks’ time, Hammond will deliver his spring Budget which is tipped to herald yet more positive news. According to that most respected of think tanks, the EY Item Club, the independent Office for Budget Responsibility (OBR) is poised to trim back forecasts for net borrowing by some £3 billion to £65bn for 2016/2017, while revising up predictions for UK economic growth this year to 1.7 per cent from 1.4 per cent, mirroring similar recent revisions by business groups and economic bodies.
The UK government’s fiscal referee will take the steps after seeing a bigger haul from tax receipts and a stronger performance from GDP in the final three months of 2016. Martin Beck, senior economic adviser to the EY Item Club, argues that Hammond will be under little pressure in his 8 March Budget to “use fiscal levers to support activity or fill any fiscal ‘black hole’”.
The OBR had pencilled in a sharp rise in public sector net borrowing during the Autumn Statement, pushing up its predictions to a more gloomy £68.2bn for 2016/17 from £55.5bn. It also made sweeping changes to its forecasts for GDP in anticipation that lower investment levels and weakening consumer demand triggered by the Brexit-battered pound and rising inflation would apply the brakes to the economy.
The OBR slashed its outlook for 2017 from 2.2 per cent to 1.4 per cent in November, while also trimming its GDP forecasts from 2.1 per cent to 1.7 per cent for 2018. Further out, it has maintained its prediction of 2.1 per cent growth in 2019 and 2020, before slipping to 2 per cent in 2021.
Improved economic fortunes aside, there is every likelihood that next month’s Budget speech will be a low-key affair, paving the way for the major fiscal event in future coming every autumn. Pressures on the NHS budget and local authority social care shortfalls may prompt the Chancellor to relax the spending constraints set in the November 2015 Spending Review, according to today’s Item Club Budget preview. Don’t expect budget-strapped Whitehall mandarins to be jumping for joy though.
Item Club economists also expect the government to push up the tax-free personal allowance to £11,800 and raise the threshold of the 40 per cent rate of income tax south of the Border to £46,500, bringing it closer to its manifesto targets of £12,500 and £50,000 by the end of parliament.
Hammond may also impose a temporary cut to fuel duty and defer the standard inflation-driven increase in Air Passenger Duty (APD) for one year to help ease the pressure on consumers in the face of mounting inflationary pressures.
Those inflation concerns are set to be the biggest economic headache in the months to come. The Bank of England will see its 2 per cent target breached shortly and come under increasing pressure to consider an interest rate hike if it spirals significantly. Consumer purchasing power is going to be severely tested over the summer months and pay demands and the threat of industrial action likely to broaden. He may be off the hook for now, but Hammond would do well to dig out the flak jacket for his autumn set-piece.