For all the resounding announcements, catchy slogans and jokes, today’s Budget amounted to little in practical terms. Chancellor Philip Hammond announced “a Budget for Britain’s future” and reiterated that, after almost a decade of spending cuts, fiscal austerity was “coming to an end”, as also suggested by the Prime Minister during the Tory party conference early this month. Alas, it is not happening now, it is only vaguely defined in practical terms, and it is conditional on a good Brexit deal.
As for the figures announced today, the government softened its signature fiscal austerity somewhat with its latest Budget, following a first move in that direction in November last year. The Chancellor had some room – albeit limited – to loosen his purse strings at this round. The Office for Budget Responsibility revised down its estimates for public net borrowings by £11.6bn this fiscal year and it also upgraded its estimate for 2019 GDP growth to 1.6%, from 1.3%. As a result, the Chancellor was able to meet the government’s pledge to increase the NHS funding (receiving an extra £84bn over the next five years), while avoiding tax hikes, for now. Overall, the government’s fiscal stance will remain slightly restrictive over the next few years, with the only exception of fiscal year 2019-20. Indeed, the structural fiscal deficit is expected to temporarily widen to 1.6% GDP (from 1.3% in 2018-19) to accommodate possible Brexit inconveniences, resuming a gentle downward trend in following years. In other words, fiscal adjustment has been back loaded, which has been a typical feature of recent budgets.
Crucially, the Chancellor pointed to the constraints of a potentially disruptive Brexit next year. While he still thinks negative Brexit developments bear a low probability, he earmarked an additional £2bn for Brexit preparations and said that he would retain the £15bn (around 0.7% GDP) rainy day fund in order to deploy it in a no-deal scenario, if needed.