TheCityUK Budget Analysis 2017

Despite the Chancellor’s assertion that today’s Budget was about more than Brexit, it is all but impossible to evaluate the latest policy proposals without considering the momentous political and economic transition the UK is about to undertake as it leaves the EU.

In our representation to HM Treasury ahead of this Budget[1], we had encouraged the government to prioritise interim Brexit arrangements, noting that the absence of such arrangements risks an increasing number of firms taking operational decisions—including UK disinvestment—on the basis of a low access scenario. In this context, we strongly support the Chancellor’s promise to prioritise an “implementation agreement” that would allow businesses to plan ahead. TheCityUK has been clear that transitional arrangements should resemble the status quo as closely as possible.

The economic backdrop to this second Budget of 2017 proved to be far gloomier than that which illuminated the first. Whereas in March of this year the Office for Budget Responsibility (OBR) had revised up its forecasts for real GDP on the basis of the stronger-than-anticipated performance of the UK economy in the eight months since the EU Referendum, today the OBR revised down those forecasts, to 1.5% (from 2% previously) in 2017 and 1.4% (from 1.6%) in 2018.

As a result, although current receipts are still expected to total roughly £745bn in 2017, they are now forecast to be £769.8bn in 2018, £792.0bn in 2019 and £817.2bn in 2020 compared to the projections of £776.4bn, £806.5bn and £834.8bn, respectively, made in March. This in turn contributes to weaker forecasts for government borrowing and public-sector debt than previously, with public-sector net borrowing now forecast to be around £15bn a year higher over 2018-21 than was forecast in March. Moreover, the Bank of England signalled its commitment earlier this month to a gradual tightening of monetary policy. In addition to raising the cost of borrowing for households and businesses, tighter monetary policy also increases the government’s debt-service costs, which may further complicate the fiscal outlook.

The longer-term outlook is dampened by the OBR’s expectations for productivity growth, which are considerably more pessimistic than previously. Its productivity growth forecast has been revised down significantly, by an average of 0.7 percentage points a year over 2017-23.[2] This is in line with the Bank of England’s recent reassessment. In its latest Inflation Report, the Bank revised down its assessment of the UK’s potential growth rate to 1.5% from 2% a year (on average) in the period to 2020, based on the observation that “The trend rate of productivity growth appears to have slowed in recent years….And the effect of Brexit-related uncertainties, including the subdued outlook for business investment, is likely to weigh further on productivity growth in coming years”.[3]

The so-called “productivity puzzle” is one of today’s biggest macroeconomic challenges both in an analytical sense and, because of the difficulty of definitively identifying the underlying causes, in a policy sense. Productivity growth depends partly on the level of skills in the labour force, and so we commend the announcement of support for maths education as well as the extension of, and additional funding provided for, the National Productivity Investment Fund.

We have consistently highlighted the fact that well-targeted infrastructure investment supports both near-term output and employment and longer-term productive potential, so we welcome the announcement of the allocation of £1.7bn for the new Transforming Cities Fund for local transport investment. We also welcome the announcement to invest £500m in 5G and full fibre broadband, which reflect the growing importance of digital infrastructure for the UK’s future competitiveness. More broadly, the emphasis on ensuring better distribution of growth and investment throughout the UK was notable. Our recent research[4] has emphasised the contribution that regional and national financial centres will make to maintaining the competitiveness of the UK as the leading international financial and related professional services industry. Policies announced today, such as the £300m in HS2 investment and £1bn in discounted lending to local authorities to support infrastructure development, should help ensure the ongoing competitiveness of cities throughout the UK and are in line with our recommendation that the government should continue to make progress with key transport initiatives.

Our research also noted the unaffordability of housing in UK cities and financial centres; our report A vision for a transformed, world-leading industry: UK-based financial and related professional services asserts that “improving the availability and affordability of housing, particularly for young professionals, will help increase the attractiveness of living and working in UK financial centres”.[5] In this context, we believe the allocation of £44bn in capital funding, loans and guarantees over the next five years to support additional housebuilding is laudable, particularly given the stated intention to focus on urban areas.

  2. Office for Budget Responsibility, Economic and Fiscal Outlook November 2017, pg 9, available at:
  3. Bank of England, Inflation Report November 2017, pg. 22, available at:
  4. TheCityUK, ‘A vision for a transformed, world-leading industry: UK-based financial and related professional services’, July 2017.
  5. Ibid.