Spending Round 2019: planned to comply with current fiscal rules
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the Spending Round 2019:
- The Spending Round 2019 sets out the government’s plans for the Resource Departmental Expenditure Limits (RDEL), the departmental day-to-day spending plans, for FY2020. Capital budgets were already in place for FY2020.
- A full multi-year spending review is planned to follow in 2020.
- In cash terms, the plans increased total public sector spending by £2.1bn in FY2019 (all RDEL) and by a significant £13.4bn in FY2020 (£11.7bn for RDEL and £1.7bn for Capital DEL (CDEL)) compared with previous projections.
- Total RDEL is planned to increase by 4.1% (YOY) in FY2020 in real terms, a real terms increase of £13.8bn. The largest YOY rises are for the NHS (£4.1bn) and education (£2.2bn).
- The Spending Round 2019 was planned to comply with the current fiscal rules: keeping the structural deficit below 2% of GDP in FY2020 and debt falling as a % of GDP.
- The spending plans were based on the OBR’s economic forecasts for the Spring Statement (March 2019). New forecasts are to be provided in the Budget (date to be announced).
Concerning other UK economic developments:
- The annual growth of consumer (unsecured) credit was 5.5% in July, unchanged from June.
- The Bank described the mortgage market as “broadly stable” in July, though the net mortgage borrowing by households and the number of mortgage approvals for house purchase both picked up in July.
- The Markit surveys for all three sectors weakened in August. Manufacturing and construction showed (slightly faster) contractions, whilst services growth slowed. Markit estimated that GDP could fall 0.1% (QOQ) in 2019Q3.
Concerning the Central Banks:
- The ECB, the Fed and the Bank of England are all due to make monetary policy announcements over the next fortnight.
- The ECB is expected to provide more monetary stimulus, to help the slowing Eurozone economy.
- There remain expectations that the Fed will cut interest rates again in September, after the July cut, despite the Fed’s attempts to dampen expectations.
- The Bank of England is expected to leave monetary policy unchanged.
- Finally, the Bank has revised its estimates of the economic fall-out of a “disorderly no deal Brexit”. In November 2018, they said there would be an initial peak-to-trough decline in GDP of 8%. This has been modified to a 5½% decline in GDP.
There have been major political developments in the last fortnight:
- The PM announced the next Queen’s Speech for 14 October 2019 on 28 August. Parliament would be prorogued from 9-12 September (date to be announced) to 14 October.
- A Motion (under Standing Order No 24), designed to take control of the Commons’ agenda from the Government for the following day, was passed on 3 September. This guaranteed time for the “European Union (Withdrawal) (No. 6) Bill 2019”, intended to avoid a “no deal” Brexit, to be debated in the Commons on 4 September.
- The “European Union (Withdrawal) (No. 6) Bill 2019” was passed by the Commons on 4 September and by the Lords on 6 September.
- The PM lost a Motion for a general election (for 15 October) on 4 September. He failed to get the necessary 2/3rds majority of MPs in the Commons.
- The Government formally lost its majority (of 1) when a Conservative MP defected to the LibDems on 3 September. In addition, 21 Conservative MPs lost the whip after voting for the 3 September Motion and Amber Rudd resigned from the Conservative party on 7 September.
Ruth Lea said, “…the Spending Round 2019 stated that it had been ‘delivered within the current fiscal rules’. Crucially, this assessment allowed for the significant increase (£13.4bn, cash terms) in spending plans for FY2020. Given the recent weakness in the public finances, this may be a challenge. But it is important to emphasise that the first fiscal rule refers to the structural (cyclically adjusted) deficit so, if the economy weakens, adjustments are made to the actual deficit to compensate. The Chancellor has said he will review the fiscal framework ahead of the Budget.”