Downgrades – everywhere, always
As was widely trailed, the Office for Budget responsibility had a fundamental rethink of its views on the path of GDP growth, productivity, investment – well pretty much everything in every year of the forecast period – as highlighted in the table below.
GDP growth is now expected to expand by around 1.5% in each year of the forecast period, leaving the economy over 2% smaller in 2021 compared with March’s expectations.
A big contributing factor is the expectation that productivity growth will now continue the subdued path since the financial crisis, rather than reverting to pre-crisis growth rates of around 2%. The OBR sets out in some detail the rationale for this in its Economic and Fiscal outlook, but the crux of it is as follows:
- Previously discussed factors such as labour hoarding, labour market slack, zombie firms and impaired access to finance, may still be contributing to the problem, but their impact is less relevant now than in the aftermath of the financial crisis.
- The productivity drags would be temporary, and it seems the problem is more enduring.
- The referendum outcome is likely to have played a part in depressing productivity growth, this year, but the report stresses a re-evaluation of Brexit impacts is not the cause of the downgrade.
- Output measurement, potentially made trickier by the emergence of the digital economy and employment growth in low productivity sectors are also in the frame.
- There is some expectation that investment will help to spur a bit more productivity growth at the end of the forecast horizon.
All in all, the new forecasts mean that the current ONS estimate that output per hour is currently 21% below its pre-crisis trend could increase to 27% in 2023. Gulp.
The writing was on the wall, what did the Chancellor do in response?
This was not the surprise news – though maybe the scale of the downward revisions were a bit bigger than expected.
So, while the Chancellor began his statement with some upbeat words on the sunny Brexit uplands that lie yonder, the growth and productivity challenges couldn’t go unacknowledged. And in response action was promised to support businesses and help hard-pressed families.
There were some specifics that are squarely focused on productivity:
- Increasing the R&D tax credit to 12% from 11%
- A £2.3bn allocation from the National Productivity Investment Fund (NPIF) to R&D in 2021/22
- New cash for infrastructure through the Transforming Cities Fund
- £190m package on skills development targeted at retraining and teaching investment
Does this mean the downgrades could have been worse?
Er, probably not. Much of the big dollars come in at the end of the period – and indeed in the next spending review period. And while the Chancellor used some of the available leeway to reduce the risk of UK businesses being left in the wake of competitors’ technology advances, through the R&D tax credit for example, collectively the measures probably haven’t moved the end point too much.
He was reading out some big numbers, what’s the fiscal damage?
There was a bit of damage – again, mainly from the OBR revisions. In their words ..
We have revised productivity growth down by 0.6 percentage points a year on average in the four years to 2021-22. This depresses growth in GDP and in the major tax bases, raising borrowing by £25.8 billion.
There was a bit of fiscal headroom. As expected the short term borrowing picture wasn’t too bad and the Chancellor also increased borrowing in each year. Public sector net borrowing is now expected to be over £30bn in 2021/22 versus the £17bn expected in March, or 1.1% and 0.7% of GDP respectively.
The big numbers were mainly extra dollars for the NHS and the widely trailed housing package, with some clawback from the now traditional package of anti-avoidance measures. Despite some last minute calls, canning the planned cuts in corporation tax and lowering the VAT threshold were not adopted to pay for other priorities.
The National Productivity Investment Fund lives on, what’s the deal with that?
So, one of the big numbers was £31bn – the new size of the NPIF. This was announced last Autumn statement to fund R&D, infrastructure, digital and housing. Some new allocations from the fund were announced today – e.g. £500m on 5G mobile and full fibre investment.
The bulk of the extra money will come in 2022/23 - £7bn and was not committed to any particular priorities as yet. Another £1bn – mainly part of the housing package, will be allocated over the rest of the period.
Any hints about what’s coming on Monday?
Monday – or in EEF towers ‘industrial strategy white paper day’ – will see the 16 months of research and consultation on a modern industrial strategy come to fruition.
The Chancellor used the budget statement to make some funding commitments to automotive, AI and data-related innovations – which will likely line up to some of the pillars of the strategy on Monday.
Devolution has also returned as a feature. More devo for those that already have it, i.e. mayoral combined authorities and a new (sort of replacement) deal for North Tyne. Less on what happens in the rest of England and no word on the infrastructure levy. This may (we hope) be part of the strategy on Monday.
What will manufacturers think of the package?
Given the list of things that could have happened in the budget (though slightly scared of speaking too soon as I haven’t read the red book, the OBR outlook and accompanying documents from start to finish), this won’t be seen as a bad outcome.
Manufacturers are set to be the main beneficiaries of the R&D tax credit increase, and there will be some relief that action was taken to limit increases to the business rates multiplier – caveated of course - the use of CPI will still represent a 3% uplift next year which guarantees that the multiplier will breach 50p in the pound for the first time ever in coming years, manufacturers were looking for the 2% cap previously used to be applied again. Given the trajectory of the multiplier, the Chancellor will have to return to this issue again.
They might, however, be a bit miffed that there wasn’t anything on the capital investment front. This should have been an open goal – and he could have scored without putting massive pressure on the fiscal numbers.
What happens next?
A spring Budget … probably not.
A spending review. Who knows?