Budget 2018: the Government spends the “fiscal windfall” on the NHS

In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the Budget 2018:

  • The Budget was substantially expansionary, with the pre-announced extra funding for the NHS the major policy decision. The extra allocation to the NHS amounted to £7.4bn in FY2019, £11.1bn in FY2020, 16.1bn in FY2021, £21.4bn in FY2022 and £27.6bn in FY2023.
  • The funding was largely met by the “fiscal windfall”, which is the OBR’s large downward revisions to the borrowing projections, mainly reflecting higher receipts. The total revisions were £5.7bn in FY2017, £11.9bn in FY2018, £12.1bn in FY2019, £11.7bn in FY2020, £14.7bn in FY2021 and £18.2bn in FY2022.
  • The OBR’s forecasts for borrowing were revised down significantly to £39.8bn for FY2017 (£45.2bn in March) and to £25.5bn for FY 2018 (£37.1bn in March). Thereafter they were a little lower than in March.
  • The fiscal mandate, which states the cyclically-adjusted PSNB (structural deficit) should be below 2% of GDP by FY2020, was met in FY2017. The OBR forecast a structural deficit of 1.3% of GDP in FY2020, giving 0.7% of GDP headroom.
  • The supplementary target, which states PSND as a % of GDP should be falling in FY2020, was also met in FY2017. The OBR projected further falls throughout the forecast period. October’s forecasts were lower than March’s.
  • The “fiscal objective”, which states the budget should be balanced by the “middle of the next decade”, was effectively abandoned.
  • In addition to the extra NHS funding, there were several other policy announcements, including increasing the Personal Allowance to £12,500 and Higher Rate threshold to £50,000 in FY2019; frozen fuel duty, frozen alcohol duties on spirits, beer and cider; and extra support for Universal Credit (UC).
  • The OBR’s overall economic forecasts were little changed, but there was a modest upgrade to GDP, on balance. The revised GDP forecasts were 1.3% for 2018 (1.5% in March), 1.6% for 2019 (1.3% in March), 1.4% for 2020 (1.3%), 1.4% for 2021 (unchanged), 1.5% for 2022 (unchanged) and 1.6% for 2023 (new forecast).
  • On Brexit the Chancellor suggested there may be “double deal dividend” if a deal, comprising “…a boost from the end of uncertainty and a boost from releasing some of the fiscal headroom.”

In addition:

  • The MPC left the Bank Rate unchanged at 0.7% at its November meeting. The minutes recorded “…the MPC judges that the monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction.”
  • On Brexit, there has been little concrete news since the mid-October Summit, with the Irish border still, apparently, proving problematic.

Ruth Lea said, “On the face of it, the large increases in NHS spending seem compatible with maintaining fiscal discipline, funded by the “fiscal windfall”, or the OBR’s major forecasting revisions. But if the economy falters and receipts growth falter too then borrowing could increase significantly, rather than falling modestly as shown in the OBR’s main projections.”

Ruth Lea CBE has been Arbuthnot Banking Group’s Economic Adviser since 2007 and was an Independent Non-Executive Director from 2005-2016.

Ruth co-founded Global Vision in 2007 and was Director until 2010, and was previously the Director of the Centre for Policy Studies (from 2004 to 2007), Head of the Policy Unit at the Institute of Directors (from 1995 to 2003) and Economics Editor at ITN (from 1994 to 1995).  Prior to ITN she was Chief UK Economist at Lehman Brothers, Chief Economist at Mitsubishi Bank, worked for 16 years in the Civil Service (the Treasury, the DTI, the Civil Service College and the Central Statistical Office) and was an economics lecturer at Thames Polytechnic (now the University of Greenwich).

She is the author of many papers and articles on economic issues and has been a Governor of the London School of Economics and Council Member of the University of London.

Tel: 020 8346 3482
Mobile: 07800 608 674
Email: ruthlea@arbuthnot.co.uk

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