TheCityUK's Spring Budget Analysis 2017

If the main backdrop to last November’s Autumn Statement was the impending exit of the UK from the EU, the main backdrop to today’s Budget was the stronger-than-anticipated performance of the UK economy in the eight months since the EU Referendum.

This relatively positive performance has been driven primarily by steady expansion in consumer spending—the largest component of the UK economy. Private consumption growth averaged 0.7% in the fourth quarter of 2016, similar to the 0.9% growth rate registered in the third quarter. Business investment, in contrast, declined by 1% between the third and fourth quarters of 2016, according to data from the Office for National Statistics (ONS).

Overall, the Office for Budget Responsibility now forecasts that real GDP will expand by 2% in 2017 (up from 1.8% in 2016) and 1.6% in 2018, compared with the forecasts of 1.4% and 1.7% for 2017 and 2018 respectively, that were made in November 2016 in the Autumn Statement. Growth has already been supported by a loosening of monetary policy in August 2016. The current forecasts imply, as the Chancellor described, that the level of GDP in 2021 is expected to be broadly the same as what was expected at the time of the Autumn Statement, but that the UK’s growth profile will be different to what was expected four months ago. In essence, UK growth is expected to be faster than previously expected in 2017, but slower than previously expected in 2018, 2019 and 2020.

Tax revenue is now forecast to be £744bn in 2017 and £776bn in 2018, up from the forecasts of £738bn and £768bn, respectively, made in November 2016. This in turn contributes to more sanguine forecasts for government borrowing and public-sector debt than previously. Despite this stronger fiscal position, flexibility becomes more important in the face of increased uncertainty, and so we strongly endorse the new charter for public finances that the Chancellor announced in November and whose principles were reiterated today. We commend the increased room for fiscal policy manoeuvre that the new charter implies and the fact that, in the Chancellor’s own words, the plan reflects a “balance between reducing our deficit, preserving fiscal flexibility and investing in Britain’s future.” We believe the avoidance of major pre-emptive fiscal stimulus is prudent—particularly in light of recent volatility in gilt trading that has seen yields rise (albeit from a low base) since August 2016[1].

Because productivity growth, which depends partly on the level of skills in the labour force, is central to long-term economic prosperity, TheCityUK believes the Chancellor’s focus on these structural issues is appropriate at a time of heightened economic uncertainty and near-term volatility. In our response to the Autumn Statement we had welcomed the introduction of the National Productivity Investment Fund to be spent on infrastructure and innovation. We have consistently highlighted the fact that well-targeted infrastructure investment supports both near-term output and employment, as well as longer-term productive potential, so we welcome the announcement of the allocation of £90m and £23m from the £220m overall allocation for road networks for the North and the Midlands, respectively.

More broadly, the emphasis on “bolster[ing] the regions” was commendable. In our recently published research analysing the economic contribution of the financial and related professional services industry to all the regions and nations of the UK, TheCityUK recommended that national and local governments adopt a clear and consistent approach to devolution[2]. The announcement of an additional £350m in funding for the Scottish government, £200m for the Welsh government and around £120m for the incoming Northern Ireland Executive is a concrete step in this direction. We look forward to the publication tomorrow of the new Midlands Engine Strategy; our recent research shows that in both the East and West Midlands, our industry accounts for around 5% of regional employment and we anticipate strategic measures that will enhance the productive potential of this economically important area.

Finally, on the occasion of International Women’s Day, it was heartening to hear the Chancellor note that “there is now a higher proportion of women in work than ever before”. TheCityUK is, however, aware that the financial and related professional services industry “faces perception issues that may hurt its credibility with women and minorities”[3]. According to our estimates, the number of females in employment in financial and related professional services in the UK rose by 13% in September 2016 compared with September 2010, and by 8% when compared with September 2006. However, data from the ONS show that female employment in financial services decreased by 3.4% in September 2016 compared with September 2010, and by 15% compared with September 2006. To address this issue, the industry has sought to improve diversity in the workplace. As we noted in our research, “the 30% Club has helped grow the share of women on FTSE 100 boards from 12.5 percent in 2010 to 26 percent (and rising)”. Our research also proposed specific policies that would help encourage greater diversity of talent, such as sponsoring diversity schemes, including increasing awareness about opportunities and an expansion of apprenticeships, temporary placements and sector-wide graduate programmes. We look forward to collaborating with the Government to advance this important goal.

  1. According to data from the Bank of England, the average yield on 10-year gilts was 1.4% in January-February 2017, up from 0.8% in August-September 2016.
  2. TheCityUK, UK-based financial and related professional services: Enabling growth across the UK, February 2017.
  3. TheCityUK, UK financial and related professional services: Meeting the challenges and delivering opportunities, August 2016.