Every fiscal event is unique, driven by the political, economic and social pressures of the day. This year's Budget has two features that distinguish it from its predecessors. Firstly, it is the last Budget before we formally leave the European Union. Secondly, it will be followed in fairly short order by a Spending Review in 2019.
Even picking a date for Budget is tricky this time around, with the possibility of it being bisected by meetings of the European Council. The questions the Chancellor faces are, will he know any more about the future direction of our economy by October/November? And between then and the end of the year is there enough time to change course if needed? How late is too late for Budget?
There is also an open question about the length of the Spending Review period. The usual approach is 5 years, that fits in nicely with the electoral cycle. But, this Spending Review comes in the middle of a parliament. We know the period will start from April 2020 but will the Chancellor set spending for that year only (to the end of transition), the end of the parliament (May 2022) or longer still?
Aside from the mechanics of these two fiscal events the financing is tricky too. The Office for Budgetary Responsibility’s (OBR) March forecast pointed to the Chancellor having headroom of about £15 billion against his fiscal mandate (borrowing at 2% of GDP by 2020/21). Since then we’ve seen an announcement of above inflation spending increases for the NHS which weren’t baked into those forecasts. That commitment, alongside other inflation-based increases in public spending could knock £6 billion off the fiscal headroom. A further £1-2 billion could be lost from below expectations GDP growth or faster increases in interest rates by the Bank of England.
Then today saw an update on the pay award for public sector workers, now the 1% cap has been scrapped. Whilst the money for that will be found from within existing departmental budgets, it increases the baseline going into the spending review.
So, at this early stage, what can we predict about the Budget? Well, we know the Chancellor will set the ‘fiscal envelope’ for next year’s spending plans. That could mean a refresh of the fiscal mandate, some more departments relatively protected, and others earmarked for further cuts.
Because the spending review comes so soon after, its sensible to assume that there won’t be lots of cash handed out for new projects or policies. But, for the same reason we might also see tax rises to shore up the public finances in preparation for the inevitable calls that will come in the new year.
A majority government might have used this as an opportunity to push through tax reform, which is always harder to deliver the closer you get to an election. It is relatively well understood that certain areas of the tax system could do with modernisation and over the years it has been increasingly difficult for government to maintain revenue levels, think fuel duty, corporation tax, some areas of employment taxes and of course business rates. But, this isn’t a majority government and we are in choppy economic waters, so maybe the Treasury will be a little less adventurous this time around.
Whatever the scale of ambition at this Budget the underlying themes of economic reform will persist, resolving the UK’s productivity puzzle, regional rebalancing and intergenerational fairness, to name a few.
By Annie Gascoyne, CBI Head of Economic Policy
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