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Spring statement: Brexit divorce bill could be £37.1bn; growth outlook 'woeful' - live updates Spring statement: Brexit divorce bill could be £37.1bn; growth outlook 'woeful' - live updates
(35 minutes later)
Our economics editor, Larry Elliott, says Philip Hammond has a lot more work to do:
Since he became chancellor in the summer of 2016, Hammond has sought to improve the UK’s productivity record through a range of measures including higher infrastructure spending, extra investment in research and development and a greater emphasis on vocational training.
But judging by its forecasts, the OBR thinks it will take many years for things to get better. It believes that the financial crisis and the deep recession that followed dealt a severe and lasting blow to Britain’s long-term growth rate, reducing it from around 2.25% a year to 1.5% a year
The OBR have also adjusted their house price growth forecasts, and now expected weaker growth from 2019 onwards.
The main organisation representing NHS trusts in England has welcomed Philip Hammond’s “encouraging” recognition that the health service needs more money, though wants “urgent” action on that front, in contrast to the chancellor’s decision to hold back any details -- and any extra cash -- until the autumn. Saffron Cordery, the deputy chief executive of NHS Providers, said:The main organisation representing NHS trusts in England has welcomed Philip Hammond’s “encouraging” recognition that the health service needs more money, though wants “urgent” action on that front, in contrast to the chancellor’s decision to hold back any details -- and any extra cash -- until the autumn. Saffron Cordery, the deputy chief executive of NHS Providers, said:
It is encouraging that the chancellor has acknowledged funding pressures faced by the NHS which mean the service can’t deliver the levels of patient care set out in the NHS constitution [key waiting time standards such as A&E treatment within four hours and planned hospital care within 18 weeks]. This winter we have seen the impact of under-funding and a lack of staff. We need to see urgent steps put in train to ensure sustainable long term funding for health and social care, because the current situation is unsustainable. It is also vital that any deal that is reached on pay is fully funded, as promised in the budget.It is encouraging that the chancellor has acknowledged funding pressures faced by the NHS which mean the service can’t deliver the levels of patient care set out in the NHS constitution [key waiting time standards such as A&E treatment within four hours and planned hospital care within 18 weeks]. This winter we have seen the impact of under-funding and a lack of staff. We need to see urgent steps put in train to ensure sustainable long term funding for health and social care, because the current situation is unsustainable. It is also vital that any deal that is reached on pay is fully funded, as promised in the budget.
The latest OBR forecasts for earnings are hardly Tiggerish.The latest OBR forecasts for earnings are hardly Tiggerish.
The fiscal watchdog estimates that real earnings growth (pay minus inflation) will be subdued over the next give years, growing by just 0.7%. The fiscal watchdog estimates that real earnings growth (pay minus inflation) will be subdued over the next five years, growing by just 0.7% per year.
Even more depressingly, growth in real household disposable income per person is expected to average only 0.4%.Even more depressingly, growth in real household disposable income per person is expected to average only 0.4%.
That means families won’t feel much better off for a long time....That means families won’t feel much better off for a long time....
Despite a very marginal upgrade to the forecast for earnings growth today, real average earnings are now expected to grow by just 3.5% over the next 5 years, meaning their level in 2022-23 would be similar to 2007-08 #SpringStatement @ESRC pic.twitter.com/bPAMO77JRbDespite a very marginal upgrade to the forecast for earnings growth today, real average earnings are now expected to grow by just 3.5% over the next 5 years, meaning their level in 2022-23 would be similar to 2007-08 #SpringStatement @ESRC pic.twitter.com/bPAMO77JRb
The Scottish government is complaining that it is not getting its fair share of the money set aside for Brexit preparations. In a statement Derek Mackay, the Scottish finance minister, said:The Scottish government is complaining that it is not getting its fair share of the money set aside for Brexit preparations. In a statement Derek Mackay, the Scottish finance minister, said:
We are just over 12 months away from formally exiting the EU without a clearly agreed path in terms of our on-going access to key EU markets - this remains the biggest uncertainty hampering economic growth and investment and dragging our economy down.We are just over 12 months away from formally exiting the EU without a clearly agreed path in terms of our on-going access to key EU markets - this remains the biggest uncertainty hampering economic growth and investment and dragging our economy down.
The UK government have indicated they will allocate £3bn over 2018-19 and 2019-20 for expenditure on Brexit preparations, but that the Scottish Government will only receive 2.5%, or £37m, of the funding allocated in 2018-19. No details on 2019-20 funding have been provided.The UK government have indicated they will allocate £3bn over 2018-19 and 2019-20 for expenditure on Brexit preparations, but that the Scottish Government will only receive 2.5%, or £37m, of the funding allocated in 2018-19. No details on 2019-20 funding have been provided.
It is deeply frustrating that money we are receiving is significantly short of a full Barnett share of the funding allocated at the UK level. Scottish Ministers will now carefully consider how these resources should be allocated to meet priority areas of expenditure and whether they are sufficient for the challenge ahead. We will not allow spending on Scottish public services to be diverted to meet the cost of a damaging UK Brexit.It is deeply frustrating that money we are receiving is significantly short of a full Barnett share of the funding allocated at the UK level. Scottish Ministers will now carefully consider how these resources should be allocated to meet priority areas of expenditure and whether they are sufficient for the challenge ahead. We will not allow spending on Scottish public services to be diverted to meet the cost of a damaging UK Brexit.
The government is theoretically committed to get net migration below 100,000 per year “Theoretically”, because many ministers believe the target is unachievable. And the OBR does not believe it will be hit either. This is what it says in a passage about its Brexit assumptions.The government is theoretically committed to get net migration below 100,000 per year “Theoretically”, because many ministers believe the target is unachievable. And the OBR does not believe it will be hit either. This is what it says in a passage about its Brexit assumptions.
Specifically, as regards the economy forecast, we assume that:Specifically, as regards the economy forecast, we assume that:
The UK adopts a tighter migration regime following departure from the EU than that currently in place, but not sufficiently restrictive to reduce net inward migration to the desired ‘tens of thousands’.The UK adopts a tighter migration regime following departure from the EU than that currently in place, but not sufficiently restrictive to reduce net inward migration to the desired ‘tens of thousands’.
Three years ago this week, George Osborne proudly announced a new Help To Buy ISA that would (he claimed) get first-time buyers scrambling onto the housing ladder.Three years ago this week, George Osborne proudly announced a new Help To Buy ISA that would (he claimed) get first-time buyers scrambling onto the housing ladder.
Under the plan, the government would provide a £50 top-up for every £200 saved for a deposit on a home (up to a £12,000 deposit).Under the plan, the government would provide a £50 top-up for every £200 saved for a deposit on a home (up to a £12,000 deposit).
A classic pre-election vote-winner, you might think. However, it was later dubbed a ‘scandal’ after it emerged that the government wouldn’t actually chip in until the home had been bought.A classic pre-election vote-winner, you might think. However, it was later dubbed a ‘scandal’ after it emerged that the government wouldn’t actually chip in until the home had been bought.
And now, the OBR has slashed its forecasts for the cost of the scheme, as take-up has been much weaker than it expected.And now, the OBR has slashed its forecasts for the cost of the scheme, as take-up has been much weaker than it expected.
The watchdog says:The watchdog says:
The original costing estimated that cumulative Government expenditure would reach nearly £700m by the end of 2017-18. But take-up so far has been well below expectations and the total value of payments in the first 22 months of the scheme – to September 2017 – was just £104m.The original costing estimated that cumulative Government expenditure would reach nearly £700m by the end of 2017-18. But take-up so far has been well below expectations and the total value of payments in the first 22 months of the scheme – to September 2017 – was just £104m.
We have revised down our forecast by a cumulative 23 per cent relative to our previous forecast. Compared to the original costing, cumulative spending is around 80 per cent (some £1.7bn) lower up to the end of 2019-20We have revised down our forecast by a cumulative 23 per cent relative to our previous forecast. Compared to the original costing, cumulative spending is around 80 per cent (some £1.7bn) lower up to the end of 2019-20
This is from Sky’s economics editor Ed Conway.This is from Sky’s economics editor Ed Conway.
It isn't so much that the UK is slumping. It's that every other major economy is accelerating, leaving the UK behind. Striking chart from the latest OBR report https://t.co/mxIcxRfe6q pic.twitter.com/vrHWMLUvSWIt isn't so much that the UK is slumping. It's that every other major economy is accelerating, leaving the UK behind. Striking chart from the latest OBR report https://t.co/mxIcxRfe6q pic.twitter.com/vrHWMLUvSW
It has attracted this comment from Rupert Harrison, chief of staff to George Osborne when he was chancellor.It has attracted this comment from Rupert Harrison, chief of staff to George Osborne when he was chancellor.
Great chart which captures the Brexit effect - no disaster but we have missed out on this latest global boom. The risk now is that (apart from the US which is absorbing a big fiscal boost) that global boom appears to be fading a little https://t.co/a9hNPwYqMQGreat chart which captures the Brexit effect - no disaster but we have missed out on this latest global boom. The risk now is that (apart from the US which is absorbing a big fiscal boost) that global boom appears to be fading a little https://t.co/a9hNPwYqMQ
This is from the Press Association’s Ian Jones.This is from the Press Association’s Ian Jones.
You have to go right back to 1875-1879 for the last time the UK economy grew by 1.5% or below for five years in a row. #SpringStatementYou have to go right back to 1875-1879 for the last time the UK economy grew by 1.5% or below for five years in a row. #SpringStatement
Here are some comments from opposition MPs on the spring statement. MPs were responding in the House of Commons.Here are some comments from opposition MPs on the spring statement. MPs were responding in the House of Commons.
From John McDonnell, the shadow chancellor:From John McDonnell, the shadow chancellor:
I say to the chancellor: his complacency today is astounding.I say to the chancellor: his complacency today is astounding.
We face – in every public service – a crisis on a scale we’ve never seen before.We face – in every public service – a crisis on a scale we’ve never seen before.
Hasn’t he listened to the doctors and nurses, the teachers, the police officers, the carers and even his own councillors?Hasn’t he listened to the doctors and nurses, the teachers, the police officers, the carers and even his own councillors?
They are telling him they can’t wait for the next budget. They’re telling him to act now.They are telling him they can’t wait for the next budget. They’re telling him to act now.
For eight years they’ve been ignored by this government. And today - they’ve been ignored again.For eight years they’ve been ignored by this government. And today - they’ve been ignored again.
The chancellor has proclaimed that there is light at the end of the tunnel. But this shows just how cut off from the real world he is.The chancellor has proclaimed that there is light at the end of the tunnel. But this shows just how cut off from the real world he is.
Last year growth in our economy was among the lowest in the G7 and the slowest since 2012.Last year growth in our economy was among the lowest in the G7 and the slowest since 2012.
Wages are lower now - in real terms - than they were in 2010 – and they’re still falling.Wages are lower now - in real terms - than they were in 2010 – and they’re still falling.
We face – in every public service – a crisis on a scale we’ve never seen before.We face – in every public service – a crisis on a scale we’ve never seen before.
Hasn’t he listened to the doctors and nurses, the teachers, the police officers, the carers and even his own councillors?Hasn’t he listened to the doctors and nurses, the teachers, the police officers, the carers and even his own councillors?
They are telling him they can’t wait for the next budget. They’re telling him to act now.They are telling him they can’t wait for the next budget. They’re telling him to act now.
From Ian Blackford, the SNP leader at Westminster:From Ian Blackford, the SNP leader at Westminster:
The progress of this government in readying for Brexit has been nothing short of shameful.The progress of this government in readying for Brexit has been nothing short of shameful.
The UK government’s own analysis tells us that under all scenarios, Scotland would suffer a relatively greater loss in economic output than the United Kingdom as a whole.The UK government’s own analysis tells us that under all scenarios, Scotland would suffer a relatively greater loss in economic output than the United Kingdom as a whole.
A no deal scenario would be significantly devastating, threatening to reduce growth by a massive 9% over 15 years.A no deal scenario would be significantly devastating, threatening to reduce growth by a massive 9% over 15 years.
Make no mistake that a hard Brexit is going to hit the pockets of families, is going to lead to a loss in tax revenue expectations. It’s therefore going to affect spending on public services, and yet the chancellor is silent on the risks to our economy.Make no mistake that a hard Brexit is going to hit the pockets of families, is going to lead to a loss in tax revenue expectations. It’s therefore going to affect spending on public services, and yet the chancellor is silent on the risks to our economy.
From the Lib Dem leader Sir Vince Cable:From the Lib Dem leader Sir Vince Cable:
The spring statement was a non-event. The OECD [see 11.33am] gave us the clearer picture - that the economy is bumping along the bottom of the G20, well behind the likes of Australia, Canada and the euro area.The spring statement was a non-event. The OECD [see 11.33am] gave us the clearer picture - that the economy is bumping along the bottom of the G20, well behind the likes of Australia, Canada and the euro area.
The OBR’s fresh forecasts are still a long way behind the figures estimated in March 2016 before the EU referendum.The OBR’s fresh forecasts are still a long way behind the figures estimated in March 2016 before the EU referendum.
It is time the government was honest with the public: there will need to be tax increases to pay for the NHS and social care, police and schools.It is time the government was honest with the public: there will need to be tax increases to pay for the NHS and social care, police and schools.
From the Green MP Caroline Lucas:From the Green MP Caroline Lucas:
I have to say that the levels of hypocrisy from this government is quite extraordinary.I have to say that the levels of hypocrisy from this government is quite extraordinary.
How can he pledge to be improving air quality while simultaneously boasting of undertaking the largest road building programme since the 1970s.How can he pledge to be improving air quality while simultaneously boasting of undertaking the largest road building programme since the 1970s.
How can he say that the plastics crisis is urgent and then propose a deadline for the elimination of plastics in a quarter of a century’s time.How can he say that the plastics crisis is urgent and then propose a deadline for the elimination of plastics in a quarter of a century’s time.
Where is the latte levy, where is the deposit scheme, where is the urgency from this action. Why is there such a gulf between government action and the words.Where is the latte levy, where is the deposit scheme, where is the urgency from this action. Why is there such a gulf between government action and the words.
Nick Macpherson, former Permanent Secretary to the Treasury (the top civil servant), suggests Philip Hammond is right to keep his fiscal firepower in case the UK suffers an economic shock....Nick Macpherson, former Permanent Secretary to the Treasury (the top civil servant), suggests Philip Hammond is right to keep his fiscal firepower in case the UK suffers an economic shock....
Sensible OBR forecast. Sensible statement by Mr Hammond. Good to see public debt could fall next year. Need headroom against future shocks.Sensible OBR forecast. Sensible statement by Mr Hammond. Good to see public debt could fall next year. Need headroom against future shocks.
Last year my collaegue Anushka Asthana revealed that, when George Osborne was chancellor, he came close to abolishing 1p and 2p coins. The idea was blocked by David Cameron, who thought the public would disapprove.
Now Philip Hammond has revived the idea. One of the 13 consultations he has published is on cash and digital payments, and the document (pdf) makes it clear that the Treasury increasingly thinks these coins are pointless. In a section of the consultation document leading up to the question “does the current denominational mix (eight coins and four banknotes) meet your current and future needs?”, the document says:
In the normal course of the cash cycle, many denominations fall out of circulation, for example, by being placed into savings jars. Surveys suggest that six in ten 1p and 2p coins are used in a transaction once before they leave the cash cycle. They are either saved, or in 8% of cases are thrown away. To meet demand created by such losses from circulation, in previous years the government and the Royal Mint have needed to produce and issue over 500 million 1p and 2p coins each year to replace those falling out of circulation.
The document also suggests that £50 notes could be abolished too.
At the other end of the denominational scale the £50 note is believed to be rarely used for routine purchases and is instead held as a store of value. There is a significant overseas demand for £50 notes, with the notes used for some transactions, but mainly held as a store of value alongside other currencies such as the dollar and euro. There is also a perception among some that £50 notes are used for money laundering, hidden economy activity, and tax evasion ...
Though the value of the £50 note is low compared to other countries’ highest denominations, in order to attempt to tackle the hidden economy and illegitimate use of cash, and maintain the integrity of the currency, some countries have removed their highest value notes from circulation or replaced them with banknotes with more security features.
Although the OBR are forecasting slow growth over the next five years, they certainly aren’t ruling out something worse.
The watchdog points out that there have been seven recessions over the last 61 years, suggesting that there’s a 50:50 risk of one in the next five years.
Thus,
...the probability of a cyclical shock occurring sometime over our forecast horizon is fairly high.
The OBR also reminds us that neither the Treasury or the City actually forecast the great recession after the 2008 financial crisis:
As regards this final risk of an unexpected recession, it is salutary to remember that exactly 10 years ago – at the spring Budget of March 2008 – the Treasury forecast that the economy would grow by a cumulative 4 per cent in calendar years 2008 and 2009, whereas the latest outturn data show a drop of 4.6 per cent.
As Chart 3.30 shows, only one of the 34 outside forecasters reporting their forecasts to the Treasury at the time predicted that real GDP would decline in either 2008 or 2009. In the Treasury’s latest survey, none of the 40 respondents expect real GDP to decline in either 2018 or 2019.
Although the growth forecast for 2018 has been marginally revised upwards, the IFS’s Paul Johnson says, overall, the picture is still dreadful.
Not that much to be Tiggerish about here. Growth forecasts dreadful compared with what we thought in March 2016, dreadful by historical standards and dreadful compared with most of the rest of the world. https://t.co/qw1tZ9zy5W
This chart illustrates one of his points.
Growth outlook much weaker than 2 years ago #SpringStatement @ESRC pic.twitter.com/J1RHB5YLc5
UPDATE: Paul Johnson’s tweet has been retweeted by George Osborne. Osborne likes Philip Hammond, and so he probably retweeted it because he thought it reflected badly on Brexit, not on his successor.
The OBR says the amount of money the government is expected to raise from the soft drinks levy - a tax on sugar in drinks coming into force this year - has halved. It says in its report:
We have once again revised down receipts from the soft drinks industry levy, which comes into effect in April. The latest revision averages £30 million a year and reflects the latest information on reformulation rates. We now expect the levy to raise around £240 million a year on average from 2018-19 onwards, less than half the government’s target of £500 million in 2019-20 when it announced it in March 2016.
The Treasury said this was a good thing because it showed that manufacturers have cut the amount of sugar in their drinks. A spokesman said:
This levy is about changing behaviour. It’s about making people healthier overall. It’s really positive that the industry has recognised this and engaged so much on this.
As the Press Association reports, from next month, the most sugary soft drinks - those with more than 8g of sugar per 100ml - are to be taxed at 24p per litre, while those with 5g of sugar per 100ml will pay 18p.
City economists are giving their verdicts on today’s forecasts, and some are pretty gloomy....
Aberdeen Standard Investments chief economist Lucy O’Carroll says Britain faces ‘a decade of austerity’ at least.
“The Chancellor was always clear that today’s event was to be a modest one, and he kept that promise. But there is little to cheer by way of economic progress. A woeful growth outlook by past standards. Potentially massive dislocation for the economy just around the corner. And all subject to huge, Brexit-related uncertainties.
“Mr Hammond was keen to push a message about there being light at the end of the tunnel. It’s true that the country’s debt burden is about to fall. It’s also true that for the first time since the financial crisis the UK is borrowing only to invest, rather than to fund day-to-day spending.
“But the Chancellor has made it clear that we’ll remain in the tunnel for a while yet: there will be no fundamental reassessment of the UK’s spending needs until 2020. That will mean, in effect, a decade of austerity – unprecedented in the post-war period.
Hetal Mehta, senior european economist at Legal & General Investment Management, agrees that Hammond probably won’t relax the purse strings later this year
“After significant downgrades to growth and upward revisions to borrowing requirements just in November, the Office for Budget Responsibility has now revised up growth (for the near term) and taken down the borrowing forecasts over the next 5 years.
“That said we don’t expect Hammond to go on a spending splurge in the Autumn Budget. He will likely save the extra room for manoeuvre ahead of the next election and to cushion any downside risks emerging from the UK’s departure from the EU.”
Jonathan Riley, head of tax at Grant Thornton UK, says Hammond’s attempts to rebrand himself as a bouncy Tigger have a flaw....
“Today was upbeat, but by the autumn we will know whether we have a Brexit deal or whether the UK will be moving straight to World Trade Organisation rules. So while Philip Hammond was the only one at the government despatch box today, the donkey in the room, the Eeyore, is still Brexit.”
Sky News’s Faisal Islam and the New Statesman’s George Eaton are both unimpressed by today’s growth forecasts (with good reason!)
Since the war there’s never been 5 consecutive years of GDP growth of 1.5% or below, as forecast today by OBR pic.twitter.com/5FHRCJJuy2
For the first time in modern history, UK GDP growth is still expected to fall below 2% in every forecast year (from now to 2022). #SpringStatement
As the Resolution Foundation’s Adam Corlett points out with this graph, the OBR now thinks that the output gap is positive. That means there is no spare capacity - in fact, the opposite
The OBR thinks the economy is now slightly above potential, for the first time since 2007-08. But that's not necessarily a good thing... pic.twitter.com/XwM8Vpa9mD
And here is the Resolution Foundation’s Torsten Bell commenting on what this means.
This means that despite almost no-one feeling like Britain's economy is going gangbusters, the @OBR_UK thinks we are actually outperforming what we can sustainably produce - that's the real pessimism underlying today's grim forecasts https://t.co/JF35t9HaE2
In its analysis of the EU financial settlement (pdf) the OBR points out that, even though the government will stop making full contributions to the EU after Brexit, the government has committed to spend money on items that used to get funding through EU membership. In paragraph B.45 it puts figures on these commitments.
Farm support - around £3bn a year
Shared prosperity fund (a proposed fund to replace EU structural funds, which fund projects in deprived areas) - around £1bn a year
Overseas development assistance (putting money that went into the EU’s aid budget into the UK’s aid budget instead) - around £1bn a year
Science and education (contributions to allow the UK to continue participating in programmes like Erasmus, Creative Europe and Horizon 2020) - around 2bn a year
Regulatory agencies (participating in various EU agencies) - around £40m a year.
This chart compares how much the UK has been contributing to the EU (the light blue bars), with the amount it will pay after Brexit as part of the “divorce bill” (the dark blue bars) and the money it will spend on items that used to be funded by the EU (the yellow bars).
The black diamonds also represent the “no referendum counterfactual” - what the UK would have spent if it had carried on in the EU. If the UK does go ahead with the “assumed spending in lieu of EU transfers” assumed by the OBR, there is no saving at all.
This does imply that the Vote Leave “£350m per week for the NHS” may be a long time coming ...
More detail of the OBR’s Brexit bill estimate:
The most detailed breakdown of the Brexit divorce bill so far. Brussels pension liabilities will last to 2064, when we’ll still owe £500m. pic.twitter.com/qjhCcVrE5R
Economics professor Jonathan Portes has dug into the OBR’s ‘Brexit bill’ work:
The Brexit dividend at last? OBR says Brexit will free up £3 billion a year by 2021-22, more thereafter, after taking account of "divorce bill"... https://t.co/RUh9cBo8V7 pic.twitter.com/cXDRAs7ToO
..but goes on to point out that it expect this to be more than offset by the negative impacts of lower immigration, productivity, etc, so the overall impact on public finances will be negative. pic.twitter.com/RWxRaQB6uC
The Office for Budget Responsibility has estimated that Britain’s financial settlement with the EU will cost £37.1bn.
This figure is based on the ‘phase 1’ agreement which the UK agreed with member states last December, and is contained in an appendix to the OBR’s latest forecasts.
Almost half this bill relates to Britain’s commitments under the current EU budget (the multiannual financial framework or MFF) that ends in December 2020.
Around half is due to meeting Britain’s share of outstanding payments at the end of the current MFF (known as the “reste à liquider” or RAL). The remaining small fraction reflects pension liabilities less assets returned to the UK, the OBR says.
Most of the bill falls in the next few years, but the final cost drags on until the 2060s ...
This falls smack in the middle of the Treasury’s own forecasts, which put the divorce bill at between £35bn and £39bn.
The OBR also warns that it is “impossible” to quantify the full effect of Brexit on the public finances today:
One of the more direct and readily quantifiable ways that Brexit will affect the public finances is by reducing or stopping the UK’s contributions to the EU budget. But, soon after the referendum, the chancellor guaranteed funding for certain EU projects after the UK leaves the EU (eg in agriculture, science and structural fund projects), subject to various conditions.
And the prime minister has subsequently stated that the UK may continue to make contributions where it wishes to participate in some European programmes.
The government has not yet fully articulated its intentions in this area and, even if it had, the precise post-Brexit outcome remains subject to negotiation.