This was arguably a political budget, aimed at shoring-up the positions of both the Chancellor and the minority government of which he is a member. It left the immediate economic outlook unchanged – of which more in a moment – and capital markets and the pound were little moved on the day. The most sensible advice for investors was, as usual, to sit tight and leave long-term portfolios intact – “don’t just do something, stand there”.
The initial read-across for Wales, subject to any response from the Welsh Government in its final Budget in December, is examined forensically by Wales Public Services 2025 at its website (declaration of interest below).
WPS 2025 note that the modest spending increases translate into an extra £1.2bn spread over four years for the Welsh Government budget, though more than half of this has strings attached and must be repaid. The lifting of the shadow of further efficiency savings will also give Wales a little more breathing room.
It is not clear if the high-profile reduction in housing stamp duty for first-time buyers will last in Wales beyond April 2018, nor whether the Welsh government will follow suit on the more lenient indexation of business rates: these are two areas where revenue raising is devolved.
There were welcome signals on North and mid-Wales growth deals, and this ex-trainspotter was pleased to see improvements at Cardiff Central included in a number of proposed regional rail developments.
More generally, trends in the Welsh economy are shaped of course by the wider fortunes of the UK. As noted, the near-term growth forecasts – and policy changes – were largely anticipated, leaving the immediate outlook unchanged. The Office for Budget Responsibility’s projections from 2018 to 2022 deserve more comment, however.
The OBR is projecting average UK GDP growth in the five years 2018-2022 of just 1.4%, after growth of 2.2% in the five years to 2017. Decimal points are overrated in this context, but this is a marked slowdown by any standards.
Forecasting is a mug’s game – this mug has tried it often enough to know – so if you’re predicting a significant break with trends you need a good reason for doing so. To stake the credibility of the national budgetary process on such an idiosyncratic view of the future is, well, brave.
Brexit is a threat, for sure. Don’t be taken in by economists talking of the benefits of free trade: they are answering a question that is not on the exam paper. We already enjoy the best possible access to our biggest and closest export markets, and our terms of trade there can only deteriorate. We’ll need improved links with more distant markets simply to compensate for these losses, and such gains are far from certain.
Talk of the UK’s strong negotiating position seems overblown. The government’s hands are tied by the referendum, and our exports to the EU matter much more to us than our partners’ exports to us matter to them.
And the budgetary savings are small in the context of the wider economy – particularly when the upfront payments that have to be made as part of the divorce process are taken into account (payments that barely featured in the referendum debate).
But excessive claims are being made on both sides.
The Treasury’s estimates of the costs of leaving managed to be both spuriously precise and overly dramatic at the same time. Other remainers made more sensationally pessimistic predictions. Earlier attempts to talk us into the euro, a strategy that had as little economic logic to it as the case for leaving does now, were quietly forgotten.
The economy has many moving parts, and growth is its default setting. Unless they are truly cataclysmic, changes in our trading arrangements, particularly if spread over a lengthy period, can be lost in the wash. The pound itself has rarely been more competitive, which helps. Even the City may be less vulnerable than feared.
Brexit is not in fact the main explanation for the OBR’s projected slowdown. Instead, the OBR are taking a big bet on poor productivity growth.
At the end of the day, few things matter more: output per employed person, or person-hour, is closely correlated to GDP per capita and real living standards. But productivity is hard to measure confidently at the best of times. As what we produce becomes more informal and intangible – services are the biggest part of all wealthy economies, and more and more services are becoming digital and virtual – those measurement problems intensify.
Recent trends in measured productivity have indeed been poor, and the academic fashion, followed here by the OBR, has been to overlook the striking growth in employment that is the flipside of those trends.
In the same way, those of us who’ve been lucky enough to be in work to begin with dwell on our own stagnating real pay without stopping to think about the gains of the newly-employed. Commentators sniffily dismissing new jobs as mostly “low quality” are mistaken (and have clearly never had to look for work themselves).
The OBR’s budget projections effectively amount to a big bet that we are able to count our increasingly intangible output as easily as people. But I would not be surprised one day to see those productivity trends revised favourably – and the government’s books being balanced more quickly than the OBR suggests.
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