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Budget 2018: A Chancellor's mission impossible?

Budget 2018: A Chancellor's mission impossible?

The Chancellor is still a long way away from delivering an ‘end to austerity’, however that is measured.

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Yael Selfin - Chief Economist at KPMG in the UK.

Chief Economist

KPMG in the UK

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As he stood up to deliver his Autumn Budget yesterday, the chancellor was to fulfil two promises which the Prime Minister had made at the Conservative party conference earlier this month: end austerity, while still reducing public debt as a share of GDP.

Fulfilling these pledges will take time, and more details will be unveiled in the Spending Review next year, but it looks as though he succeeded, at least in part. For now, what we know is that the UK should expect 1.2% average increase in departmental spending from next year.

Better prospects for UK public finances, despite the weaker economic backdrop, gave Philip Hammond an additional £14.8 billion on average to spend over the next five years. He chose to use most of that in his Budget announcements, leaving the outlook for public finances largely unchanged.

This Budget was a first tentative step towards ending austerity, with Hammond earmarking £20.5 billion to cover a pledge that Theresa May made this summer to raise spending on the NHS. He then promised an additional £1 billion to spend on defence, and smaller additional immediate spending on social care, education, and road maintenance.

But, the chancellor is still a long way from delivering an “end to austerity”, however the yardstick is measured.

He has certainly not thrown caution to the wind. The substantial uncertainty about what form any exit deal with the EU will take, with only five months left before the UK is expected to be leaving, means that the chancellor is probably right to leave himself some spare room to manoeuvre in the event of a significant negative shock to the UK economy.

He left his £15 billion pot to tackle Brexit emergencies unchanged, which he plans to release in the event of a smooth Brexit. However, undoubtedly more will be needed in the event of a difficult transition and a no-deal.

In addition to increasing departments’ day-to-day spending as part of the end-to-austerity drive, the government is to fund extra investment to improve the UK’s weak productivity performance, which will require more money. The chancellor announced another £6 billion to spend on the National Productivity Investment Fund from 2020-2025, but more is likely to be needed.

Will all this be enough to transform the UK economy?

The UK tax burden is not particularly high compared to many of its peers. In its latest outlook released earlier this month, the International Monetary Fund (IMF) estimated that UK government revenue will represent just over 36% of GDP this year.

Other countries, such as France, are estimated to have a much higher ratio of 53%; Finland, Denmark, and Belgium are expected to reach a ratio of 51% this year; Sweden nearly 49%; Germany 45%; the Netherlands and Portugal over 43%; Canada just over 39%; and Spain just under 38%.

The list of developed countries with a lower ratio than in the UK estimated for 2018 is unsurprisingly smaller, and includes most notably the US, with an estimated government revenue to GDP ratio of only 31%; Switzerland with 33%; Australia with just over 35%; and Ireland with a mere 25%.

Of course, even with those figures in mind, it is unlikely that the government will be able to pass any significant tax increases in the current parliament, given its precarious position. Just look at the attempts last year, which had to be hastily reversed for political reasons.

However, the austerity in Britain is unlikely to magically go away. In order to deliver its vision for the UK economy, important choices will need to be made over this decade. 

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