Spring Budget 2017: The Budget that wasn’t | KPMG | UK

Spring Budget 2017: The Budget that wasn’t

Spring Budget 2017: The Budget that wasn’t

UK's last Spring Budget leaves more work to be done.

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In his final Spring Budget, the Chancellor was on plan to wean his audience from the spring affair, with little of significant economic policy substance announced yesterday. The Chancellor was handed a gift by the Office for Budget Responsibility in the form of an upgraded outlook for 2017, in anticipation of more resilient consumer spending, although expectations for GDP growth in later years were scaled back slightly, in line with the Bank of England’s outlook published last month.

The Chancellor may be right to opt for a small neutral budget, resisting a premature splurge and prioritising prudence and consistency, with only a few necessary additions to address immediate needs for social care, NHS and the changes to business rates. The major changes to his spending plans included an increase of around £2 billion in social care funding over the next three fiscal years, which in total amounts to 10 percent of spending on social care in 2015-16 and £2.2 billion for education - mainly in later years, which in total amounts to only 2.6 percent of education spend in 2015-16.

While the Chancellor stressed the importance of improving UK productivity performance, no further spending was announced beyond the small support for education. No doubt the Chancellor is saving as much as he can for any possible deterioration in the economic outlook later on, but more would need to be done in order to make the UK fit for its new future.

If the UK economy is to absorb the shock of Brexit well, and emerge stronger from it, preparing a saving pot for a temporary boost on rainy days will not be sufficient. The Chancellor must strive to transform the economy over the next few years and make it ready to face the new economic realities.

There are two important areas where the UK economy was already lagging before the EU referendum, which may have contributed to the Brexit vote. UK productivity is below most of its peers, putting downward pressure on wages and on people’s future prospects at work. While access to opportunities vary significantly across regions, with not insignificant parts of the society in some regions disengaged altogether from the labour market. Brexit adds new challenges in the form of a potentially reduced labour pool and rising trade barriers with the EU.

Ever since the Great Recession broke out in 2008, UK productivity has been in the doldrums. In the nine years to the fourth quarter of 2007, output per hour in the UK rose by 21 percent, but it has seen a mere 0.2 percent rise in the nine years since. Productivity performance also varies significantly between regions, with London well ahead of the rest of the country - output per hour is 39 percent lower in Northern Ireland compared with London; and 34 percent lower in West Midlands and Yorkshire.

Education has an important role to play in increasing productivity, but total UK spending on education has fallen from 5.3 percent of GDP in 2011-12 to just 4.5 percent in 2015-16, with the biggest declines coming from cuts to local government spending on education, which, in England, fell by 13 percent in the same period. The funding available to universities is also under threat from the UK leaving the European Union. Estimates from the Higher Education Statistics Authority suggest that 14 percent of UK research funds come from the EU. So far, the Chancellor’s announcements go some way in addressing these challenges, but much more is likely to be needed if the UK is to upgrade its labour force in line with what is required.

Creating incentives that will integrate the parts of the population currently disengaged from their local economies can also go a long way in reducing inequality across regions and in building a more inclusive society. This is also an important area since the availability of EU workers is likely to diminish in future, and therefore something the Chancellor may wish to focus on in November. But with current uncertainties ahead of Article 50 being triggered, and relatively strong growth, the Chancellor has some time on his side.

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