Spring forward or fall back?

Ahead of Budgets and Spring Statements, speculation usually revolves around what the forecast will say and what the Chancellor will do. But, as with so much in UK politics in 2019, next week’s version feels different. We might expect little change in the Office for Budget Responsibility’s (OBR’s) economic and fiscal projections: yes the economy appears to have slowed markedly at the start of 2019, but most forecasters are assuming that some of that missing growth is recovered in future years. And, even as the economic growth figures have disappointed, we’ve seen upside surprises on employment (again), on pay (at last) and on the public finances (confirming that the good fiscal news delivered in the autumn has permanence). More so than usual, the uncertain current economic and political backdrop would seem to discourage big changes in predictions of what might come next. And we can expect very little on the policy front too. Parliamentarians are likely to be somewhat distracted next Wednesday, voting on Brexit to decide our economic future rather than focusing on forecasts of it.

The fact that those decisions remain outstanding raises the chances that the Chancellor chooses to keep his powder dry, waiting to see which way the Brexit wind blows before setting his course for this year’s Spending Review for instance. That review is due to happen in the autumn, meaning he will need to set out the overall spending envelope before too long. But delays are commonplace in government these days. He suggested back at the Budget that he might be in a position to increase the total available to departments relative to the provisional figures he set out alongside the new NHS deal. That though was contingent on securing an orderly Brexit and an associated double “deal dividend”. That is yet to arrive – adding weight to the suspicion that he’ll give himself a little more time before committing.

But, while the Spring Statement might not be one that generates many answers, it will at least set out the backdrop to some crucial questions. It comes at a hugely important time for the UK economy. Uncertainty abounds, and the risk that the early-2019 slowdown persists or develops into a downturn is non-trivial. The OBR’s central case outlook might well be only modestly weaker than its October one, but the chance that something altogether more serious occurs is definitely heightened, with the Bank of England now assessing there to be a one-in-four chance of recession in 2019. So it’s worth asking how well placed different parts of the economy are to deal with what might come next.

More specifically, this paper explores the three big questions being asked of the UK economy right now: How much of the business investment that’s gone missing in recent years and months will eventually return, and how much is permanently lost? When and how will consumers bring their spending back in line with their incomes? How does government ‘end austerity’ while simultaneously delivering the reductions in an elevated stock of debt it wants to see?

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