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It mostly covers my work as UNISON Scotland's Head of Policy and Public Affairs although views are my own. For full coverage of UNISON Scotland's policy and campaigns please visit our web site. You can also follow me on Twitter. I hope you find this blog interesting and I would welcome your comments.

Thursday, 9 March 2017

UK Budget 2017 - still no coherent economic plan


The UK Budget does little for hard pressed households in the short-term, and even less for the long-term health of the economy.

Let’s look at the issues that matter to UNISON members.

Austerity is supposed to be driven by the budget deficit, so some good news that deficit is reducing this year. However, the Office of Budget Responsibility (OBR) forecasts that it will go back up next year, instead of shrinking as planned. There is a modest short-term giveaway of around £1.7 billion in 2017-18, dominated by additional funding for local authorities in England to deliver adult social care. This is followed by a modest medium-term takeaway averaging around £750 million a year from 2019-20 onwards. So this is probably the best year we can expect for public spending for a while.

The Barnett consequential for Scotland of all this adds up to £350m. Very welcome relief, although still only a dent in the austerity cuts. It’s a bit like having your pocket picked and the thief returns part of his ill gotten gains.

Looking ahead, the OBR expects real GDP growth to moderate during the first half of 2017, as rising inflation squeezes household budgets and real consumer spending. The relatively strong start to the year implies 2.0 per cent growth in real GDP in 2017 as a whole (still very modest by historical standards), up from 1.4 per cent in November, with small downward revisions thereafter. Most experts think even these forecasts will be optimistic against most Brexit scenarios.

As always the devil is in the detail. For example, the OBR notes the decision to reduce the personal injury discount rate, which will substantially increase the size of one-off settlement payments. The Government has set aside an extra £1.2 billion a year to meet the expected costs to the public sector, notably to the NHS. Health Boards in Scotland take note!

Next, members will be concerned about wages. The OBR has made a downward revision to earnings growth of 0.1 percentage points over the forecast period, with the growth rate rising progressively from 2.6 per cent this year to 3.6 per cent in 2021. Wages are still below 2008 levels in real terms. Even this is a fantasy for public sector workers because of the UK and Scottish government’s 1% pay policy.



The OBR believes that additional employer costs such as the apprenticeship levy and pension auto-enrolment will be borne by the workforce through lower wages. Even though the latest data indicate that corporate profits have risen strongly in recent quarters. Non-oil corporate profits are estimated to have increased by just under 11 per cent in the year to the third quarter of 2016.

The headlines in the budget relate to the less favourable tax treatment of the self-employed. In fairness, there is some justification for these changes and it might make bogus self-employment marginally less attractive. However, there is no justification for the cuts in Corporation Tax, given the growth in corporate profits. Anyone who still believes in the Laffer curve should look at this chart.


So what does this mean for household incomes? According to the latest National Accounts, the headline saving ratio fell to 5.6 per cent in the third quarter of 2016 as consumer spending growth outpaced household disposable income growth. In effect the Chancellors increased revenues are being paid for out of squeezed household incomes and falling savings. Not a basis for a long term economic plan. This chart makes the point graphically.



Overall, while there is some short term public spending relief, the economy is currently being sustained by debt-driven consumption and a low exchange rate, and the Chancellor has done little to address the long-term challenges.

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