TheCityUK Budget Analysis

The annual Budget is traditionally a statement of domestic fiscal policy. But it was inevitable that with the terms of the UK’s departure from the EU in five months’ time still uncertain, Brexit would feature prominently in the Chancellor’s statement.

Nowhere was the link between the UK’s economic prospects and its relationship with its largest trading partner clearer than in the Chancellor’s assertion that if failure to conclude an exit deal led to any material change to the fiscal or economic outlook, it would result in a new Budget superseding this one in early 2019 via an “upgrade” of the planned Spring Statement to a “full fiscal event”. TheCityUK noted in its representation ahead of the Budget that the conditions of EU exit and the nature of the UK’s ongoing relationship with the EU will provide an important near-term framework for economic policymaking (1). We therefore clearly understand the prospect of a new Budget in the event of an undesirable ‘no-deal’ Brexit scenario to be economic reality rather than political threat. 

Assuming a smooth post-Brexit transition (2), the economic picture that underpins this Budget is mixed; relatively positive recent indicators are tempered by the uncertainty and downside risk of the coming months. The Office for Budget Responsibility (OBR) has revised down its forecast for real GDP growth this year, from 1.5% previously to 1.3%. This, and higher government spending, help boost the forecast for growth in 2019, from 1.3% previously to 1.6%; growth over 2020-23 is expected to average 1.5% per year.

The relatively robust recent performance has led to a cyclical improvement in the public finances, with government borrowing down by £11bn year on year in the first six months of the 2018-19 fiscal year, at £20bn. The OBR expects government borrowing to rise to £32bn in 2019-20 from £26bn in 2018-19, but then fall steadily over the next three years, reaching £21bn by 2022-23.

In last November’s Budget the OBR’s sharply lowered expectations of productivity growth were an unwelcome surprise. The so-called ‘productivity puzzle’ remains 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. We have consistently highlighted the fact that well-targeted infrastructure investment supports both near-term output and employment and longer-term productive potential; the extension of the National Productivity Investment Fund (NPIF) by an extra year to 2023-24 is therefore welcome.

We lauded the announcement in November 2017 of the allocation of £1.7bn for the Transforming Cities Fund for local transport investment as part of the NPIF. We are now pleased to see the extension of the Transforming Cities Fund by a year, to 2022-23, with an allocation of an additional £680m to this Fund for the new year. We believe the Transforming Cities Fund is noteworthy in a number of ways. First, the commitment to sustainable transport projects is crucial if the UK is to meet the development goals set out in the 2008 Climate Change Act and 2015 Paris Agreement. Second, it implicitly recognises the importance of urban areas to the UK’s continued prosperity. At a time when cities are sometimes criticised for taking a disproportionate share of national resources, the Fund implicitly recognises that cities—which are home to more than 80% of the UK’s population and generate nearly 90% of its GVA—remain extremely powerful agents of economic growth and income generation.

Finally, the emphasis on local transport projects is most welcome. According to the latest data from the Office for National Statistics, labour productivity (measured by output per hour) rose by 0.5% quarter on quarter and 1.5% year on year in Q2 2018—a relatively strong performance compared to recent quarters. However, more granular analysis shows that the aggregate data mask significant subnational variations, and that a number of UK regions have productivity levels 15-20% below the UK average (3).Locally-targeted and -delivered infrastructure investment is an opportunity to potentially narrow this regional productivity gap.

The announcement in September 2018 that Derby & Nottingham, Leicester, the North East, Norwich, Plymouth, Portsmouth, Southampton, Sheffield, Stoke-on-Trent and West Yorkshire have been shortlisted to bid for Fund resources is a significant step towards implementation of the scheme; we would reiterate the importance of investing in cities in Northern Ireland, Scotland and Wales as well. Government policy must help ensure the ongoing competitiveness of cities throughout the UK; our recent research recommends that the government should continue to make progress with local transport initiatives (4).To this end, our Budget representation specifically sought investment in key road networks on the grounds that it would help enhance connectivity and increase capacity between cities. We therefore strongly support the announcement of £28.8bn for the National Roads Fund for strategically important roads.

Our research highlighting the particular contribution of regional financial and related professional services centres (5)  also emphasised the importance of digital infrastructure. We urged a commitment to further investment in digital infrastructure, as set out in the UK Industrial Strategy. In this context, the allocation of £200m from the NPIF for pilot projects to deploy full fibre internet in rural locations is noteworthy.

Overall, the Chancellor has delivered a Budget with an eye to one possible future. The months ahead will determine what the critical next steps will be.

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Footnotes

1) TheCityUK, 'TheCityUK Budget representation 2018', available at: https://www.thecityuk.com/research/thecityuk-budget-representation-2018/
2) The Budget notes:“The OBR has not attempted to predict the precise outcome of negotiations with the EU. Instead, it has made broad-brush assumptions, which have not changed since Autumn Statement 2016. However, the OBR has included a transition period in its forecast of exports and imports for the first time. This postpones the point at which EU exit affects imports and exports to 2021". These broad-brush assumptions include an exit deal and its orderly implementation.
3)TheCityUK, 'Regional reflections: productivity and employment', available at: https://www.thecityuk.com/news/regional-reflections-productivity-and-employment/
4)TheCityUK,'Enabling growth across the regions 2018', available at: https://www.thecityuk.com/assets/2018/Reports-PDF/b408b7220a/Enabling-growth-across-the-UK-2018.pdf
5) Ibid