Investment Clock insights

No big spending fireworks in the Spring Statement, but the fiscal outlook is Brexit dependent


Melanie Baker

13 March 2019

The modest stimulus and hints of more spending to come were welcome news for the UK economy, especially against a backdrop of weaker global growth but better than expected UK fiscal finances. The Chancellor made very clear, however, that the fiscal outlook was Brexit dependent.
There were no big spending fireworks in the Chancellor’s Spring Statement, though there was a modest additional net stimulus.  The deficit projections have been lowered again, also giving the Chancellor more theoretical spending ‘headroom’.
Despite revising their forecasts for 2019 real GDP growth lower, the Office for Budget Responsibility (OBR) revised down their government deficit forecasts.  That largely reflects projections of higher income tax receipts (higher earnings growth assumptions) and lower debt interest spending (reflecting lower market expectations of rate rises).  The amount of ‘headroom’ in the fiscal numbers therefore rose (i.e. the extra net spending the Chancellor could engage in before breaking the fiscal mandate) from £15.4bn to £26.6bn.  The OBR did warn though that, in the event a smooth Brexit is achieved, market interest rates and debt interest payment projections may rise again, i.e. reducing that headroom.
There were some tax and spending announcements, with a net cost of £2.1bn by 2023 as calculated by the OBR (i.e. amounting to a modest net stimulus). The Chancellor also announced that the next multi-year spending review (that sets departmental budgets) would start in the summer and be published alongside the Budget in the autumn.
There were plenty of Brexit messages in the Chancellor’s statement though, warning that future spending was dependent on agreeing a deal with the EU and a smooth transition period.  He described there being no simple readily available fix to avoid the consequences of a hard Brexit. He also warned that the fiscal and monetary response would need to be ‘carefully calibrated’ given inflation risks, with the UK at or close to full capacity and given any reaction in sterling.

The modest stimulus and hints of more spending to come were welcome news for the UK economy, especially against a backdrop of weaker global growth but better than expected UK fiscal finances. The Chancellor made very clear, however, that the fiscal outlook was Brexit dependent.

There were no big spending fireworks in the Chancellor’s Spring Statement, though there was a modest additional net stimulus.  The deficit projections have been lowered again, also giving the Chancellor more theoretical spending ‘headroom’.

Despite revising their forecasts for 2019 real GDP growth lower, the Office for Budget Responsibility (OBR) revised down their government deficit forecasts.  That largely reflects projections of higher income tax receipts (higher earnings growth assumptions) and lower debt interest spending (reflecting lower market expectations of rate rises). The amount of ‘headroom’ in the fiscal numbers therefore rose (i.e. the extra net spending the Chancellor could engage in before breaking the fiscal mandate) from £15.4bn to £26.6bn. The OBR did warn though that, in the event a smooth Brexit is achieved, market interest rates and debt interest payment projections may rise again, i.e. reducing that headroom.

There were some tax and spending announcements, with a net cost of £2.1bn by 2023 as calculated by the OBR (i.e. amounting to a modest net stimulus). The Chancellor also announced that the next multi-year spending review (that sets departmental budgets) would start in the summer and be published alongside the Budget in the autumn.

There were plenty of Brexit messages in the Chancellor’s statement though, warning that future spending was dependent on agreeing a deal with the EU and a smooth transition period. He described there being no simple readily available fix to avoid the consequences of a hard Brexit. He also warned that the fiscal and monetary response would need to be ‘carefully calibrated’ given inflation risks, with the UK at or close to full capacity and given any reaction in sterling.

Source: Office for Budget Responsibility (OBR)

Past performance is no guide to the future. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.