While the bulk of the extra spending unveiled today in the 2019 Spending Round had already been announced, its overall stance was a bit looser than had been anticipated. This could raise GDP growth by about 0.2ppts in 2020 and by 0.1ppt in 2021, representing a rare upside risk to our current GDP forecasts.
- While the bulk of the extra spending unveiled today in the 2019 Spending Round had already been announced, its overall stance was a bit looser than had been anticipated. This could raise GDP growth by about 0.2ppts in 2020 and by 0.1ppt in 2021, representing a rare upside risk to our current GDP forecasts.
- With its focus on just the 2020/21 financial year rather than the next three to four years, this was one of the thinnest Spending Rounds for some time. However, Boris Johnson had suggested that there would be a big increase in government spending in 2020/21 and his Chancellor, Sajid Javid did not disappoint.
- An increase in real spending of about £6.5bn relative to existing plans had always looked likely. The existing spending plans embodied in the 2019 Spring Statement were for an increase in day-to-day real spending (or RDEL – resource departmental expenditure limits) of £4.5bn or 1.5% in 2020/21. But the Government’s recent commitments on no deal preparations (£2bn in 2020/21), the NHS, defence and overseas aid (£5.9bn), schools (£2.0bn) and police (about £1bn) had pointed to an increase in day-to-day spending of about £11bn in total, or another £6.5bn relative to the existing spending plans.
- In the event, the Chancellor announced a total increase in day-to-day spending of £13.8bn, or £9.3bn (0.4% of GDP) of funds over and above the existing plans. Meanwhile, his announcement that no department would see a real terms cut in their budget in 2020/21 allowed him to claim “an end to austerity”. (See Table 1.) Based on the Office for Budget Responsibility (OBR)’s fiscal multipliers (i.e. the impact of a given change in government spending or taxation), the extra government spending amounts to a 0.3% or so increase in GDP in 2020/21, split into 0.2% in 2020 and 0.1% in 2021.
- Of course, the Government’s spending plans are only one side of the fiscal coin. With the rising chance of an election (see our UK Economics Update “Key points on the next general election”, 3rd September), Johnson and Javid may not be able to abstain from a further pre-election fiscal bonanza. If they were to follow through with his pledges on the campaign trail to cut taxes by raising the 40% income tax threshold and increase the NICs threshold that would cost an extra £20bn in 2020/21. This would dwarf the Trump stimulus would be enough to equal the total discretionary loosening seen after the financial crisis. (See Chart 1.) Meanwhile, Javid suggested that plans are already in place for a fiscal stimulus in the event of a no deal Brexit. As such, the Spending Round could yet prove a small step in the path to a big fiscal loosening.
- Admittedly, any further loosening would probably breach the fiscal rules, even if there is a Brexit deal. The margin against the main fiscal rule (for the structural deficit to be below 2% of GDP by 2020/21) is pretty slim, at around £5.7bn and could shrink to zero when the OBR updates its forecasts later in the year. Unsurprisingly, then, the Chancellor has announced a review of the fiscal rules ahead of the Autumn Budget. That’s a hint that he intends to loosen fiscal policy further.
- Clearly a lot could change not just with Brexit but who is in Government. But the big picture is that a substantial fiscal loosening seems to be in store – whether that is under a Conservative or Labour Government, or in a deal or no deal Brexit scenario.
Chart 1: Discretionary Fiscal Expansions (% of GDP)
Table 1: Real Day-to-Day Spending by Department
Sources: Refinitiv, Capital Economics
Ruth Gregory, Senior UK Economist, +44 20 7811 3913, email@example.com