The key economic message from (yesterday’s) UK 2017 Budget is that there was something of a loosening of macro fiscal policy with a number of measures aimed at encouraging investment and growth. Analysis of the details is covered by many commentator elsewhere. The main point of our interest here is the changed OBR view of the overall economy’s future. It suggests fiscal policy is not going to do much for absolute or relative UK productivity and competitiveness in the next few years.
The most important OBR message is that growth stays below 2% per annum (averaging about 1.4%) because productivity only increases from just below to just above 1% per annum for the foreseeable future. In consequence, unemployment rates start to rise (though still below 5%) and the inflation rate peaks shortly and falls back to target (2% per annum). Real earnings start to rise modestly, but only from 2019. The rise in business investment is anchored at about 2.4% per annum and household consumption increases at a similar rate to the economy as a whole (averaging 1.4%). Net trade contributes nothing. As a result, the government deficit ratio drops slowly from over 2% to about 1% over five years and the public sector net debt peaks at 86.5% of GDP in 2018/19 but is still as high as 79% by 2022/23.
The message is stark. If the central forecast is for growth below 2% a year, the downside risks could be ominous. If Brexit imposes new barriers to trade, as currently seems likely, the risk of recession becomes far from negligible. The need to fix the ‘broken’ model of UK development is profound. Whether it comes from a domestic resurgence fueled by policy on skills, innovation and investment, from an indigenous spark of entrepreneurship and competitiveness (cheap £), and/or from new trade deals with various parts of the growing world, the productivity deficiency has to be closed. An Industrial Strategy white paper is expected shortly. The economics and development community will need to interrogate this closely and deeply when it comes. The fear is that it’s all too late to avoid a harsh economic period in the years ahead. The broken economy needs mending.