Source: Financial Times
Strong data on UK deficit reduction, robust productivity growth and continued high employment prompted Britain’s finance ministers to vie for the limelight on Wednesday.
First Liz Truss, chief secretary to the Treasury, cast aside the normal caution at the finance ministry to declare the latest public borrowing figures to be “strong”. Then chancellor Philip Hammond trumped his junior to comment on all the economic data that had been released.
“Best run of productivity since before the financial crisis . . . yearly borrowing reduced by over £100bn since 2010; good economic news as we build an economy fit for the future,” he tweeted.
The good headlines do not stop there. In cash terms, the UK deficit has now shrunk to less than £40bn over the most recent 12 months of data.
This is below the cash rate of borrowing before the financial crisis, the Institute for Fiscal Studies, a think-tank, pointed out.
And at less than £40bn, the deficit is almost exactly 2 per cent of national income: this is the level that the government has pledged to bring underlying borrowing down to by 2020-21. Mr Hammond has a more exacting goal of balancing the government’s books by the middle of the next decade.
In the short term, the much better than expected economic data leaves the Office for Budget Responsibility, the fiscal watchdog, in a race to decide how much to upgrade the outlook for Britain’s economy at Mr Hammond’s spring statement to MPs due on March 13.
The OBR indicated on Wednesday the upgrade will be “significant”, just four months after its much anticipated cut to productivity forecasts led Treasury officials to talk about a “bloodbath” in the public finances.
The first task for the OBR will be to assess whether the improvement in the latest official figures about the public finances will prove permanent — or if they simply represent a temporary blip of good news for the Treasury.
January tax receipts are the most important of the year. This is because they coincide with the deadline for income tax self-assessment payments, but all the talk of strong receipts appeared odd when they were £1.4bn lower last month than a year earlier.
The answer to the puzzle is that the January 2017 receipts were thought to be artificially high due to a move by the previous chancellor George Osborne to increase income tax on dividend payments.
The OBR had expected owners of companies to respond to Mr Osborne’s reform by shifting more dividend payouts into the 2015-16 financial year, and pay tax in early 2017. This would enable them to avoid his tax increase on dividends that took effect in 2016-17.
But with the self-assessment receipts only £500m lower in January 2018 than a year earlier, it is likely company owners did not accelerate as many dividend payouts as feared.
This in turn implies that genuine economic activity was better than previously thought in 2015-16, and there is little sign that it tailed off, so the OBR is therefore likely to view much of the tax receipts surprise as a permanent improvement in the borrowing position.
Economists estimated the government would borrow just over £40bn in 2017-18, down from £45.8bn in 2016-17, and significantly less than the £49.9bn predicted by the OBR at the time of Mr Hammond’s November Budget.
In the past, when faced with a similar upside surprise, the OBR has tended to assume that some of the strength continues, but that some does not.
This implies that when the OBR produces its new forecasts next month, borrowing could be reduced by about £7.5bn in 2017-18 and in subsequent years.
The OBR faces a more difficult decision about whether to raise the UK’s long-term economic growth outlook to reflect the much improved productivity performance in the third and fourth quarters of 2017.
Productivity is a key driver of economic growth, but the OBR is likely to be much more cautious in assuming the recent good data persists into the future, reflecting how quarterly figures tend to be volatile.
Ben Broadbent, deputy governor of the Bank of England, told MPs on Wednesday to be cautious about the recent sharp rise in productivity growth. Reminding the Commons Treasury select committee that it was a quarterly number, which was “noisy”, he said “we should be wary about quarterly measures [of productivity]”.
Howard Archer, chief economic adviser to the EY Item Club, said the productivity data in the fourth quarter looked oddly strong because it was “heavily reliant on an unusual drop in average hours worked by full-time workers”.
With productivity per worker only 0.4 per cent higher in the fourth quarter than a year earlier, the evidence for a sustained pick-up in underlying growth is likely to be too weak to influence the OBR’s main economic projections.
Meanwhile, although the employment rate remains high, at 75.2 per cent in the fourth quarter, other labour market data suggested a less glowing outlook. Notably, the unemployment rate nudged higher to 4.4 per cent, implying labour related tax receipts are unlikely to rise quickly.
But an improvement of £7.5bn a year in the forecasts for the public finances — or roughly half the “bloodbath” downgrade from the November Budget — will be very welcome news for Mr Hammond.
Until the figures are revised again, the latest data will allow the chancellor to have thoughts of giveaways in the Budget later this year.