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The chancellor Philip Hammond, has delivered his Spring Statement.

Spring Statement 2019

The chancellor delivered his annual assessment of the economy in the context of the imminent departure of the UK from the EU.

Chancellor Phillip Hammond has delivered his Spring Statement, meeting expectations that this would “not be a fiscal event”.

In what was a low-key statement, Hammond used the opportunity to deliver a stark Brexit warning to MPs: back the Brexit deal on offer and the economy is set to grow, with more public spending later this year. Reject the deal and risk continued uncertainty, “disruption” to the economy and cutbacks to public spending.

More broadly, there was a focus on productivity and the environment in the Statement, with a number of consultations launched around both themes.

Other announcements included a £3 billion new Affordable Homes Guarantee Scheme; a requirement on company audit committees to review payment practices in an effort to tackle the “scourge” of late payments; and a new review on the employment and productivity effects of minimum wage rates, aimed at informing wider work underway on the Low Pay Commission’s future remit.

Headline figures 

The OBR has faced a significant challenge in its latest forecast for the economy, with the Spring Statement set during a week of crunch votes on Brexit. At the time of writing, MPs have rejected Theresa May’s Brexit deal for a second time and have rejected leaving the EU with no deal. 

As such, the OBR has stated that its forecast has been produced against the backdrop of “considerable uncertainty over the next steps in the Brexit process”. With nothing concrete to indicate otherwise, the forecasts are based on the assumption that the UK makes an orderly departure from the EU on 29 March into a transition period that lasts until the end of 2020. However, with uncertainty on the next steps for Brexit and the Prime Minister, it may well be the case that this set of forecasts is significantly revised at the next Autumn Budget. 

OBR and Barclays GDP forecasts

2019

2019

2020

2020

2021

2022

2023

OBR

Barclays

OBR

Barclays

OBR

OBR

OBR

1.2%

1.1%

1.4%

1.3%

1.6%

1.6%

1.6%

The OBR has downgraded its growth forecast to 1.2% for 2019, from a 1.6% forecast at the last Autumn Budget. While Hammond pointed to faster projected growth in 2021 and 2022, he warned that a no deal Brexit would mean “significant disruption” in the short and medium term, and a “smaller, less prosperous economy” in the long term. The Chancellor’s main message was that he could unlock more spending if MPs back Theresa May’s Brexit deal, providing for an orderly exit and transition period. 

The OBR has revised down public sector borrowing in every year of the forecast period. The organisation believes public sector borrowing will be £6 billion lower by the end of the five years than in its October forecast. Exceeding the Autumn Budget’s expectations, this allows Hammond to promise more public spending and tax cuts later this year – however this is conditional on a Brexit deal being passed by MPs. 

How does the OBR produce its forecasts? 

The Office for Budget Responsibility (OBR) was created in 2010 to provide independent analysis of the UK’s public finances. It is tasked with producing detailed five-year forecasts for the economy and public finances twice a year, which accompany and inform the Government’s Autumn Budget and Spring Statement. 

The OBR uses a large-scale macroeconomic model for the production of its economic forecast, which is jointly maintained and developed by the Treasury and the OBR. It works with various Government departments to gather numerous separate forecasts for different categories of revenue, spending and financial transactions, which it then collates and uses to generate aggregate forecasts for spending and tax receipts and for the various measures of public sector borrowing and debt.

Upcoming spending review

Provided that a Brexit deal is agreed, the Chancellor will launch a three year spending review before the summer Parliamentary recess. The review will set departmental budgets, with Hammond offering the promise of a “deal dividend” as a result of increased business confidence and investment as well as a reduction in the need for emergency ‘no deal’ funds.

The spending review will cover the NHS, but also social care, schools, the environment and policy, and will have a renewed focus on “delivering high quality outcomes”. Hammond’s aim is for this to be ready for the Autumn Budget 2019, so it will likely inform many of the spending commitments made at that time. 

Demonstrating the UK’s openness and competitiveness

Framed against the context of Brexit, Hammond’s Statement contained a number of measures aimed at demonstrating that the UK remains an “open and competitive” place to do business. 

For financial services, the Government will consult and then “legislate as necessary” to ensure that in the immediate period after leaving the EU, the UK can maintain “world-leading” regulatory standards, remain open to international markets and realise new trading opportunities.

The Government has also reiterated that it stands ready to deliver its commitment “in all circumstances” to provide additional funding to the British Business Bank for venture and growth capital, as in a post-Brexit world the UK’s relationship with the European Investment Fund changes. 

More broadly, the Competition and Markets Authority (CMA) has announced that – subject to an orderly exit from the EU – it will carry out a review to assess how regulation affects competition in the UK business environment. 

In terms of skills and talent attraction, the Chancellor reiterated previous commitments to reform the apprenticeship levy, meaning that from 1st April, employers will see the co-investment rate they pay cut by half from 10% to 5%, at the same time as levy-paying employers are able to share more levy funds across their supply chains. The Chancellor also announced that from Autumn 2019, PhD-level occupations will be exempt from the cap on high-skilled visas. 

On immigration, the Chancellor announced that from June, paper landing cards will be abolished and citizens from the US, Australia, New Zealand, Canada, Japan, Singapore and South Korea will be able to start using E-gates. Hammond stated that the Government’s ambition is to “go further in due course” to signal the UK’s commitment to global Britain.

The Government also announced a number of consultations that seek to further the UK’s ambition to remain at the forefront of technological development. This includes a consultation on the future of mobility, which will set out the Government’s approach to responding to significant changes taking place in transport technology such as the growth in electric vehicles, the development of self-driving vehicles and advances in data and internet connectivity.

The Government will also be publishing its International Research and Innovation Strategy, which will set out the Government’s ambition to ensure the UK retains its place as a global partner of choice for science and innovation collaboration. 

Change on the way for tech and digital companies

There has been a growing consensus among policymakers around the need for more regulation for tech giants such as Facebook and Google. In the last Budget, Hammond announced a new Digital Services Tax: a 2% tax rate on the sales of specific tech giants in the UK. Government will now be taking this forward by consulting on the detailed design and implementation of the tax, which will take effect from 1st April 2020. 

Additionally, the Government appointed a Digital Competition Expert Panel six months ago to consider the potential opportunities and challenges the emerging digital economy poses for competition and pro-competition policy.

The panel – led by former Obama advisor Jason Furman - published their final report to coincide with the Spring Statement. They concluded that large tech companies do not face enough competition and recommended the establishment of a new Markets Unit to set and enforce digital rules, as well as updating the CMA’s tools and powers to allow them to protect and promote competition in the digital economy. 

The Government will be responding to the full report in the summer, however the Chancellor sought to demonstrate his commitment to the agenda by adopting one of the Panel’s recommendations immediately, announcing that he will be writing to the CMA to ask them to carry out a market study of the digital advertising market as soon as possible. 

A focus on clean growth

Protecting the environment was another theme of the Statement, with confirmation that the Government will launch a global review to assess the economic value of biodiversity and to identify actions that will simultaneously enhance biodiversity and deliver economic prosperity.

A Future Homes Standard will mandate the end of fossil-fuel heating systems in all new houses from 2025, while the Government will also issue calls for evidence on requiring air passenger carriers to offer genuinely additional carbon offsets and on measures to help small businesses cut their carbon emissions through the Business Energy Efficiency Scheme announced at the last Budget.

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