IFS 2017 Green Budget – the good, the bad, and the worrying?

by Heather McLoughlin

On Tuesday I attended the Institute for Fiscal Studies (IFS) Green Budget for 2017. This is an annual event where the IFS looks at economic issues facing the Chancellor before his first Spring Budget in on 8 March 2017 (CFG will be Live Blogging on the day).

The IFS Green Budget comes at a time where the environment of predicting the UK’s economy has never been so hotly contested. With Brexit on the horizon (the event was hosted on the same day as the Bill to trigger Article 50 was passed) the future of the UK’s economy is important to charities and the beneficiaries they support.

It is important to note that all this speculation has come before Article 50 has been triggered and before the UK and EU have agreed any trade deal. That the UK is currently within the EU, thus operating on the same trading regulations as before the referendum vote on the 23rd June 2016. These predictions have mainly been based on a best trade deal scenario.

What’s the Big Picture?

Despite predictions that Brexit and a Trump presidency would severely damage two of the world’s leading economies (and therefore have a knock on effect on the global economy) on a macroeconomic level the global economy has seen an uneventful year. Growth has been growing at 2.2% in 2016 and while this growth is expected to expand to 2.6% in 2017. It is still below the long-term historical average of 2.8% globally and the 2016 growth rate was the slowest rate since 2009.

Predictions are that 2017 will be a lot more challenging – for both political and economic reasons. While the Eurozone has remained relatively stable this year, the wide range of EU elections and the triggering of Article 50 by the UK could lead to potential economic uncertainty. So far the signs are positive that Europe and the Eurozone will remain resilient to any economic shocks.

For emerging markets (EM’s) their growth slowed to 3.4% in 2016, again the slowest since 2009. For many emerging markets, the IFS predict that it will be Trump’s policies that will affect their futures, whether he pursues an infrastructure agenda (good for EM’s), a protectionist element (bad for EM’s) or whether the Federal Reserve’s hike interest rates, resulting in a strong dollar (bad for EM’s). For charities that work overseas and in emerging markets 2017, it is important to realise that the economy in these areas might go two ways in 2017.

Last year also saw the return of inflation for many advanced economics, as the effect of low prices from 2015-16 fades. The UK is predicted to see inflation rise to 3% in the second half of 2017.

How does the UK’s economy fit in?

Despite fears of the impact of the Leave vote on the UK economy, GDP has grown by 2% in 2016 (though before the EU vote it was predicted at 2.5% in IFS Green Budget in 2016). This has come mostly through consumer spending at 1.75% of overall growth and is good news for charities that rely on donations as the UK consumers are still willing to part with disposable income.

However, consumer spending is expected to slow down to 1.5% by 2021 as other economic factors start to come into effect (inflation, wage squeezing, high tax rates). Furthermore, investment by businesses remains low ( even before the EU referendum this was the case). It business investment is not expected to increase to a level that will have a meaningful impact on GDP any time soon.

For 2017 predictions do not look as rosy. With the weak pound, inflation will rise and household purchasing power will be squeezed. Growth is forecasted at just 1.5% a year from 2017-2021, a dip back into 2007 recession era levels of growth. This will mainly be due to a slow down on consumer spending. Charities might struggle to receive the same level of income from donations and may also struggle to support beneficiaries (both at home and overseas) with a weaker pound.

It is also expect that there will be a squeeze on wages, especially for those who do not work in sectors that allow advantageous job hopping. Parallel to the potential squeeze on wages is the second year of frozen benefits and the UK is currently in the middle of a four year scheme. For many households, disposal income is expected to become less for at least the next decade.

What is the UK government doing?

With the arrival of Philip Hammond in No. 11 the UK saw a change in fiscal policy. Hammond, after infamously turfing Osborne out the back door of the Treasury, proceeded to follow through on turfing out Osborne’s economic policy of austerity to meet strict fiscal targets by the end of Parliament.

Now Hammond has said that fiscal policy is not currently subjected to any fiscal targets that can be met or missed by the end of this Parliament, giving Hammond much more flexibility to reach his first fiscal target in the next Parliament in 2020-21. This flexibility can also been see in the government’s welfare spending target as Hammond has moved the policy of a ‘welfare-in-scope’ review from an annual review to a five year review. For charities that work with beneficiaries who receive benefits it is important to note that most changes to welfare will be in place from April 2017.

However, this fiscal flexibility does not stop a nearly 4% cut in real term public service spending to departments over the rest of this Parliament. As has been reported before unprotected departments which faced large spending cuts from 2010-2015 will also see large spending cuts, such as Justice, DCLG, and DCMS which is where the Office for Civil Society currently resides.

Departments like DiID, Health and Education are currently ring-fenced from cuts. For charities this is a mixed bag. Those that work with one of the unprotected departments could find it increasingly harder to gain funding, compared to those who work with the ring-fenced departments.

Combined with inflation and wage squeezing, the government will be presenting UK households with their highest tax bills since the 1980’s to help reduce the deficit. By 2020 tax will account for 37% of national income, which is the highest since 1986. This trend is expected to continue into the 2020’s.

In Conclusion

The Good:

Despite a shaky year politically for the world, and in particular the EU and the USA, the global economy has remained pretty stable. While growth has slowed and inflation has risen, economies are still progressing further away from the 2007 recession.

For the UK a good Brexit deal and favourable trade agreements with other countries might help mitigate any risk from when the UK leaves the EU. Though the UK economy did not grow as much as expected in 2016 the June Referendum did not have as much of a disastrous effect on the economy as predicted. Some might also take comfort that the £8 billion that was sent to the EU will now be a boost to the UK’s budget and could be put into the deficit.

The Worrying:

Though the economy remained stable in the face of unpredictable political events it is not certain whether this will continue. Globally inflation is expected to rise and growth is expected to slow. For the UK, trying to negotiate trade deals in this situation might not be advantageous to the UK economy.

The Bad:

On the home front the UK is likely to face continued austerity well into the 2020’s due slow UK growth, higher taxation, uncertainty over Brexit and rising inflation. For charities this will mean the trend for an increase in demand for services and a squeeze on the availability of income from individuals and governments will continue to at least the mid-2020’s. With the continued austerity and changes to Universal Credits charities should be aware that over the next few years their services will be more important than ever.

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