Rachel Reeves delivered a ‘do nothing’ statement at a time when the world is in tumult
Some assessment of what impact Middle East turmoil could have on the world economy would have been welcome
As expected, the Chancellor’s Spring Statement was policy light, in the extreme. That left it up to the Office for Budget Responsibility (OBR) to add some zest to the day.
It would have been interesting to see what impact the OBR thought the current Middle East turmoil would have on the world economy. However, their forecasts were little changed from before, as the pandemonium began after they had closed their forecast window. In truth, they would probably have had little of substance to add, as it is nigh on impossible to forecast the implications of such sudden and large scale geopolitical events. They would probably have upped their discussion of (downside) risks but I doubt they would have gone so far as to put the UK government in a difficult position over future growth and potentially missing fiscal targets.
In the absence of such economic changes, and much in the way of government policy changes, any shifts in the OBR’s forecasts for GDP growth, inflation and interest rates were minor, although there was a significant reduction in expected net migration.
So both the Chancellor - policy wise - and the OBR - economic and fiscal forecasts wise - are taking a wait and see approach. That’s probably wise for now but if things remain in turmoil and economic risks remain high then the next Budget, towards the end of the year, could be a very difficult one. An extended Middle East crisis could lead to higher energy prices and in turn higher inflation, raised interest rates and lower growth. Such negative developments could more than wipe out the fiscal headroom that the Chancellor currently has and force her into further hard decisions over raising taxation (already at a historical high) or cutting spending (already unrealistically low in places).
Both bodies will be hoping that things calm down, and soon, but that seems unlikely. Little is resolved in the Middle East and Donald Trump continues with his ‘policy bombshell a day’ strategy, while in UK politics the Labour led government is weak and prone to policy reversals. The idea that business and consumer confidence is in for a resurgence any time soon seems highly implausible.
For Scotland, the oil and gas price changes have wider political importance of course. The OBR has future North Sea revenues falling to near zero by 2028, when the impact of the energy profits levy (EPL) is due to become negligible. This level is much lower than at the time of the last independence referendum, which would make examination of how to fill any funding gap tricky to say the least, if there were any such discussion. As it is, the notion of independence is a live subject coming up to the next Scottish Parliament election but debate around the substance of what this entails is sorely lacking.
The OBR assume oil prices will stay around the $65 a barrel mark over the forecast. In the current circumstances they have risen to over $80. If oil prices were to remain high then it could impact on the future debate around independence. (In 2014 the oil price was well above $100 a barrel and Scottish/UK oil revenues were predicted to be over £10 billion.) However, at some point the oil price is likely to return to the $50-70 a barrel range that seems to be acceptable to producers and consumers alike. This would mean that an independent Scotland would have little in the way of a North Sea dividend with which to help pay for the 26 per cent higher public sector spending per head vs England (as estimated by the Institute for Fiscal Studies (IFS) last month) that it currently benefits from. Hard facts can often lead to empty rhetoric, as it seems to have in this case.
So we remain - in Scotland and at the UK level - perched in a precarious economic and fiscal position, with high taxes and debt, alongside potentially underfunded public services And this at a time when economic perils and severe spending pressures abound. The idea that anything in this Statement, the last Budget or even the last Spending Review is going to seriously alleviate pressures on the NHS, Courts and Prisons, Special Needs school costs, rising NEETs, defence spending pledges does not hold much credence. On top of these concerns come on-going issues with regards to low productivity growth, managing an ageing society and meeting environmental challenges.
All of this is happening in a relatively ‘normal’ world of Conservative or Labour Party hegemony. Should the Reform Party or the Green Party break through then even more bets will be off, partly due to their existing economic policies and partly due to the fact that these, ‘loosely’ costed policies, will inevitably change - but to who knows what - prior to coming to power or to a position of influence within a coalition.
In Scotland, the politics may be equally bewildering but the outcome - an SNP win - seems, at present, to be clearer. However, that will not be much comfort as the Scottish Budget is in such a mess, and so many decisions have been postponed until after the election, that hugely difficult questions await being answered later in the year.
The Chancellor has decided on a ‘do nothing’ statement at a time when the world is in tumult. But hard choices lie in store and they will not be going anywhere, anytime soon.
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