Economic Update

Mr Hammond is used to facing down calls to loosen the purse strings whenever he makes a formal statement to parliament. On this occasion, the Treasury had pre-empted the more-money pleas to some extent by stating “…there will now only be one major fiscal event each year”, i.e. the Autumn Budget.

The Chancellor had some other useful defences against spending demands. A Spending Review is due imminently, which we now know will cover three years (from 2020) rather than the more usual five years. There is also the matter of Brexit, which Mr Hammond assumed would end with an agreed deal “in the next few weeks”.

If Mr Hammond’s assumption about the Brexit outcome proves correct, the state of government finances suggests that there will be scope for extra spending. Last October, the OBR projected a government deficit of £25.5 billion for 2018/19, £16.4 billion (39%) lower than in 2016/17. A little under five months later, the OBR now thinks that the deficit will be a more modest £22.8 billion. The £2.7 billion drop is primarily due to higher than expected tax receipts. In particular, the all-important month of January produced a bumper £14.9 billion government surplus, helped by record self-assessment tax receipts of £21.4 billion.

This tax bounty has prompted the OBR to build assumptions of higher government revenue into its forecasts for the next five years, providing the Chancellor with some extra ‘wiggle room’. However, the OBR’s overall economic outlook has changed little since October, when the forecast was for 1.6% growth in 2019, followed by 1.4% in each of the next two years. The OBR has now revised those growth figures to 1.2% in 2019, 1.4% in 2020 and 1.6% in 2021 – slightly more pessimistic than the Bank of England’s latest forecast.

The Bank’s number-crunching, like the OBR’s, assumes “a smooth adjustment to new trading arrangements with the EU”. As at 13 March, that was by no means a certainty after the previous day’s ‘Meaningful Vote’ (mark II). It is little wonder Mr Hammond chose to keep the Spring Statement as close as possible to a fiscal non-event.