Open Britain’s Assessment of the 2017 Autumn Budget

Summary

Open Britain has undertaken a detailed assessment of the 2017 Autumn budget. This briefing is for your information ahead of the debates on the budget in Parliament next week. Our top-line analysis is as follows, with further in-detail analysis provided below.

  • Brexit bill: The budget allocation of £2.8bn by the end of 2020 for the NHS is less than the £3bn which has been set aside for Brexit over the same period – despite Vote Leave’s promise that Brexit would lead to more funding for the NHS.
  • Growth: Economic growth forecasts for the coming years are down considerably in comparison with pre-referendum projections.
  • Wages: A downward revision of wage growth, coupled with projected inflation levels ahead of earnings, means that the average Briton will be worse off in both 2017 and 2018.
  • Productivity: Brexit uncertainty is hitting productivity, with pre-crisis pay unexpected to recover until 2025.
  • Investment: Brexit-related uncertainty is keeping business investment down and will lead to import growth declining to 0.2% by 2020 from levels of 3.3% in 2017.
  • Immigration: Post-Brexit, immigration is set to decline, reducing output and putting the public finances under further strain. 

In detail

A further £3bn for Brexit by end 2020 but only £2.8bn for the NHS during the same period

  • It is clear that the £350m a week promise for the NHS is as far from becoming a reality as ever.
  • The Chancellor has had to set aside a further £3bn in order to prepare for Brexit in the 2018-2020 period in addition to £700m provided to date[1].
  • This is in comparison to just £2.8bn extra funding being promised over the same period for the NHS[2].

Growth forecasts are down considerably compared with pre-referendum projections

  • Brexit is clearly having an impact on growth, with economic growth forecasts being revised down in comparison with previous projections.
  • The Chancellor announced growth has been revised down to 1.5% in 2017 “before slowing in 2018 and 2019”[3]. The Office for Budget Responsibility (OBR) puts growth decreasing to 1.4% in 2018, 1.3% in 2019 and 2020, respectively.
  • This contrasts with pre-2016 referendum forecasts of 2.2% for 2017 and 2.1% for all three years in the 2018-2020 period.[4]

The average Briton will be worse off in 2017 and 2018 as the UK prepares to leave the EU

  • The average UK citizen is set to suffer a further two-year fall in real wages. The OBR forecasts that earnings will grow by 2.3% in 2017, 2018 and 2019 respectively[5]. These forecasts are considerably down since the March 2017 OBR forecast.
  • According to the OBR, wages will grow by 0.3% less in 2017, 0.4% less in 2018 and by 0.6% less in 2019 than they had predicted in March of this year.[6]
  • As inflation is forecast to be at 2.7% in 2017 and 2.4% in 2018, this means that in real terms, the average Briton will be worse off in both years.
  • The Resolution Foundation has noted that by 2022, disposable income per person is now set to be £540 lower by 2022 than previously expected.[7]

Brexit uncertainty hitting productivity with pre-crisis pay not recovering until 2025

  • A key theme of the Chancellor’s budget was to improve and enhance productivity. But the Government’s approach to Brexit is making this task much more difficult.
  • As the OBR have pointed out “the renewed weakness of productivity growth over the first half of 2017, for example, will almost certainly have been exacerbated by the Brexit vote – notably by the effect of uncertainty on business investment and the hit to real consumption from the inflationary impact of the fall in the pound.”[8]
  • Lower productivity is linked to lower pay, and the Resolution Foundation now forecasts that average pay will not return to pre-financial crisis levels until 2025.[9]

Business investment and import growth affected by Brexit uncertainty

  • While the budget concedes that business investment in the UK has been negatively affected by ‘uncertainty’[10] it does not elaborate on the cause for this.
  • The OBR makes this much clearer, highlighting specifically how uncertainty surrounding Brexit is continuing to negatively affect business investment.[11]
  • As for import growth, the OBR expects Brexit to lead to a lower trade intensity of UK economic activity. They forecast that import growth will slow to 0.2% in 2020, which constitutes a significant fall from current levels of 3.3%.[12]

Immigration is set to decline, putting the public finances under further strain.

  • Today’s findings by the OBR amount to a clear admission that a Brexit-related fall in immigration will reduce economic output.
  • The OBR’s forecasts are based on Office for National Statistics population projections, published in October, which forecast a fall in net inward migration to 165,000 a year by 2023, down from 185,000 in 2021. The OBR notes that “this implies a smaller adult population, reducing potential output in 2021-22 by 0.2 per cent.”[13]
  • The OBR make this assumption on the basis that “the UK adopts a tighter migration regime following departure from the EU than that currently in place.”[14]

[2] Ibid, p.65

[3] Ibid p.1

[12] Ibid p.21

[13] Ibid p.8

[14] Ibid p.38