Spring statement: finger in the air

Tom Stevenson
Tom Stevenson
Fidelity Personal Investing13 March 2018

The Chancellor did his best to prepare us for an insubstantial Spring Statement. He failed, however, to pave the way for what he delivered - an almost wholly fact-free half hour.

Shorn of tax and spend announcements, the point of the new Budget-lite Spring Statement is really nothing more than an update on the Office for Budget Responsibility’s forecasts for growth, inflation and the public finances.

In normal circumstances, this would be a useful review, but these are not normal circumstances. The fact is that in just over one year’s time Britain will be leaving the European Union and any forecasts that pretend to cover the next five years must necessarily come with an enormous set of caveats.

In the absence of clarity on the transition period, let along what comes next, the OBR’s estimates are just a finger in the air guess. For the Chancellor to present them as anything more reliable is disingenuous.

The growth forecasts are modestly higher this year and next but the truth is that between now and 2022 they are dependent on how we leave the EU. The Chancellor said that forecasts were for beating. We must hope that he is right, given that the UK economy is not expected to expand by more than 1.5% in any year over the forecast period.

As for the deficit, the £45.2bn shortfall was better than forecast last Autumn but less good than economists had pencilled in.

What he had to say about inflation was much more interesting, if also a matter of speculation. According to Mr Hammond, the OBR now expects inflation to fall from the current 3% to the Bank of England’s target of 2% within the next 12 months.

Given that our inflation rate is a symptom of the post-referendum weakness in the pound, this is entirely plausible. And, if achieved, the Chancellor will also be right to predict that wages will exceed inflation over the next five years.

So, sluggish growth but marginally rising living standards beckon.

What this points to is a prolonged period of lower for longer interest rates, in which the gap between our rates and those in the US continues to widen, putting further downward pressure on the pound. More of the same, in other words.

And frankly, that is about it. All the other measures he mentioned, we already knew about or are so trifling as to be irrelevant.

The reviews that he flagged up have the potential to be interesting. In particular, a review of how multi-national digital business pay tax, with a view to linking it more closely to where they engage with their customers rather than where, notionally, they earn their profits. This is overdue and it could have a real influence on the level of those profits in due course.

This desire to frustrate the ambitions of digital businesses that are widely seen as too powerful is a red flag for investors who have enjoyed the recent surge in technology sector share prices - even if the regulatory squeeze remains some way off in reality.

Set piece economic statements are always political events so we were probably naïve to expect the Chancellor to review the numbers and sit down. A televised speech is too good an opportunity to land some blows on an opposition whose economic credentials are equally full of holes.

But the Chancellor’s continuing single-minded focus on reducing the deficit is a gamble. It risks missing a change in the mood music in a country which is starting to question whether the public sector and the people it serves should continue to bear the brunt of balancing the books.

But, the deficit was the safest ground for a Chancellor who didn’t dare mention the topic rightly obsessing those on the benches behind him. His reticence to mention Brexit is understandable but less than we might have hoped for.

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