Budget 2017- the economy strikes back

The chancellor delivered his budget against a challenging political and economic background, as Julian Francis explains.

All eyes were once again on Philip Hammond as he left No 11 with his famous red box to present to parliament and the nation a new budget. It seems like only yesterday that he was presenting the last budget and there is a reason for that as the last time he did so was in March. As part of the chancellor’s plan to move the budget to the autumn, 2017 has been the year of two budgets. 

So, has much changed? Well, quite a lot actually! 

In the last nine months, the political backdrop has changed enormously. The UK triggered Brexit and begun negotiations on the terms of its departure from the EU. The prime minister called a snap election calling for strong and stable government but lost her majority in the process. Jeremy Corbyn went from being a no hoper to the saviour of the left - and maybe even the country.

The loss of their majority in June’s election sparked fresh Brexit infighting within the Conservatives. The government has the backing of the DUP for now, but Mr Hammond - who is distrusted by many on the right of his party - does not have unlimited political capital in the bank.

Economic conditions have changed too, although there is fierce debate about how much of this is attributable to uncertainty and negativity over Brexit and the political chaos that has gripped the nation.

In 2016, the UK was second only to Germany in the G7 for growth but since then the UK has been steadily slipping down the league table. The International Monetary Fund has predicted that UK growth will slow to 1.7% in 2017 and 1.5% in 2018. This will filter through to the government’s own projects.

Inflation has risen to 3%, its highest level in five years, while growth has faltered a little.

However, borrowing levels are at a ten-year low due to the rising rate of inflation, giving Mr Hammond more flexibility. The rising cost of goods may be a headache for the average consumer, but for the chancellor it has been a windfall with VAT receipts on the rise. Combine this with the lowest level of unemployment since the mid-1970s and the chancellor has gained some room for manoeuvre for what was always going to be a tough budget. 

That said there are still two worrying fiscal indicators flashing red on the economic dashboard. UK productivity has stalled since 2008 and the Office for Budget Responsibility is expected to downgrade its estimates for productivity going forward. This presages lower growth in years to come placing more pressure on long-term economic forecasts and revenue projects. Combine this with wages falling in real terms due to inflation hitting peoples’ pockets and we could be in for a tough couple of years ahead.

Julian Francis is the director of policy and external affairs at the Association for Consultancy and Engineering.