Philip Hammond prepares to give his 2017 Budget. Photo by Leon Neal/Getty Images.
#Budget2017: Zero out of four
Yesterday we set the Chancellor four tests for whether his Budget would deliver for working people. Today we have no good news to report. This wasn’t a budget for living standards, it didn’t give the British economy the investment it needs to see us through the uncertainty of Brexit, and public services remain under severe pressure from unnecessary funding cuts. Working people are still waiting to see how the Prime Minister’s pledge of an economy that works for everyone can be squared with a Budget that works only for those benefiting from cuts in corporation tax.
TEST 1: Will the Budget give Britain a pay rise?
The key number: Will real pay have returned to its pre-crisis peak before the end of the parliament?
The result: NO
At the Autumn Statement the OBR reduced abruptly the already dismal real earnings performance since the financial crisis. They revised down real earnings in 2020 by £1000, with the average worker facing 13 lost years when earnings were below the pre-crisis peak.
Now the Budget. While the OBR revised up GDP growth for 2017, they expected slightly weaker growth for the next three years. Likewise there was a small upward revision to average earnings growth in 2017, but there were small downward revisions to average earnings growth over the following years. The inflation forecast is barely changed. The sum of the parts is a real earnings profile that is almost unchanged compared with the autumn statement.
Real earnings will still be below the pre-crisis peak at the end of the parliament, in fact the position has deteriorated very marginally. Previously real earnings in 2020 were forecast to be £360 below the pre-crisis peak (on an annual basis), now they are expected be £400. Workers still face thirteen lost years: at best.
Real average weekly earnings, 2016 prices
Source: ONS and OBR projections
TEST 2: Will rising consumer debt reveal living standards under strain?
The key number: Will consumer debt exceed the pre-crisis peak before 2019?
The result: YES (NB a bad yes)
While the stronger GDP growth in 2017 was mainly driven by consumer spending, there were modest offsetting downward revisions to consumer demand growth in later years. But the lack of improvement in real earnings means that, in the absence of pay growth, people are likely to be forced to continue to rely on consumer credit. The OBR show an adjusted saving ratio (measuring the difference between spending and income) turning negative in 2017 and deteriorating through to the end of their forecast (chart 3.20).
They also show the reliance on consumer credit to boost the economy increasing since the Autumn Statement (driven mainly by higher outturn figures from the ONS). Credit as a share of household income is revised up each year, and is now expected to exceed the pre-crisis peak one year sooner in 2018 rather than 2019.
Unsecured consumer debt as share of disposable income
Source: ONS and OBR
While the OBR point out (box 3.1) that much of the strength in recent years “can be attributed to dealership car finance”, they also note that over the past year “credit card lending has played a bigger role”.
Mark Carney has already observed that the Bank of England are “concerned enough” about this state of affairs “to look at it more closely” (at the Treasury Select Committee hearing on 21st February). But its clear that the Government have done little to heed this warning. With real pay slowing, consumer credit looks set to take the strain of supporting living standards.
TEST 3: Will the Chancellor put the investment needed into infrastructure?
The key number: will public investment match the OECD average?
All the Chancellor did today was announce some specific initiatives that would come under the ‘National Productivity Investment Fund’ of £23bn that he had already announced. As we have pointed out repeatedly, even with this fund, government investment as a share of the economy will be lower in this Parliament than it was in the last.
The OBR have now incorporated downward revisions to government investment in 2015.
Our earlier OECD comparison was based on UK government investment of 2.7 % of GDP in 2015, this is now estimated at 2.6%. The OBR forecast now has this rising to only 2.7% by 2020, rather than 2.9%.
Our ranking is still 20 out of 27 countries, and unless the Chancellor does something dramatic in the Autumn Statement that’s where it will remain.
Government investment in 2015, % GDP
Source: OECD National Accounts Dataset 11: government expenditure by function and TUC calculations
TEST 4: Will the Chancellor give public services the funding they need?
The key number: Will government current spending growth reach 3% a year?
The Budget released some welcome – if insufficient – funds for social care – see my colleague Matt Dykes’s coming post.
But this was not a Budget intended to support the public sector, public sector workers or the economy.
On the basis of our preferred measure of government current spending (see yesterday’s blog for details), the increased spending announced was marginal at best.
There was a slight increase in spending growth in 2017, to 2.4% from 1.9% at AS16. But in all other years spending growth was effectively unchanged. Over the whole of the parliament average annual spending growth is now 1.6%, up from 1.5%.
This goes almost nowhere towards our (still modest) target of 3%. And it’s a country mile below the spending growth seen before the financial crisis, when public service investment was still seen as a priority.
Government expenditure (excluding transfers), annual growth