Chief Economist’s Briefing – Autumn Statement 2016

Chancellor Hammond’s first Autumn Statement will also be his last. From now there will be a solitary annual Budget event per year. Its swansong was a low key affair. The financial crisis still casts a long shadow with the deficit reduction road lengthened again. But it didn’t stop a regrouping for a new attack on economic public enemy number one – poor productivity.

A hole to fill. As is customary, the Autumn Statement kicked off with latest vintage of the growth and fiscal forecasts from the independent Office for Budget Responsibility (OBR). As expected, the news wasn’t good. A £110bn hole has emerged in the public finances since March. There are two main reasons – growth downgrades and weaker tax receipts.

Growth downgrades bite. At the time of the March Budget the growth outlook was for uninterrupted 2% GDP growth for the remainder of Parliament. Next year’s forecast of 1.4% (same as the Bank of England) and 1.7% in 2018 are quite a trim. Productivity growth has yet again been downgraded, too.

So do weaker tax receipts. The changing nature of employment and economic growth is taking its toll on the public finances. The increase in self-employment in recent years is reducing the tax take. More people are incorporating and therefore paying tax on dividends and profits rather than employment income. The OBR expects more of us to do similar in coming years. Increasingly aware of the squeeze on the breadth of the tax base, the government is set to propose changes and consult.

More borrowing and a higher debt peak. Taken together these make for a delay in eventually eradicating the budget deficit. The March Budget aimed to be running a surplus of £10bn by 2019/20. That year is now expected to see a deficit of £20bn. The cumulative increase in government borrowing to 2021 is a hefty £110bn. Unsurprisingly, given the larger deficit flows, the stock of debt will peak later than previously expected, too, at around 90% of GDP in financial year 2019/20.

New fiscal rules and a dose of flexibility. The fiscal straight-jacket of the previous Chancellor has been jettisoned. Flexibility is the order of the day. The government will aim to bring the cyclically-adjusted budget deficit into balance as early as possible in the next Parliament. The commitment in this Parliament is to bring the ‘cyclically-adjusted’ deficit to below 2% of GDP. This will allow more borrowing for investment – a sensible approach.

A new productivity fund. Improving the UK’s productivity performance has eluded many. Philip Hammond is tackling it anew. The flagship spending announcement was £23bn for a National Productivity Investment Fund. Let’s hope it’s just as successful as another 23 – the number Michael Jordan wore on his basketball jersey. To raise living standards in the coming years it needs to be.

Housing, more please. The UK persistently and significantly fails to build enough new homes so the largest element of the Fund (around one-third) will support house building, with the aim of delivering 100,000 new homes “in the areas that need it most” and 40,000 affordable homes. That falls short of what the UK needs but if successful it would help. Part of the Fund will be used to build infrastructure to ‘unlock’ land for house-building. Planning restriction is where the war needs to be waged.

Transport, telecoms and R&D. Other initiatives had been announced earlier in the week. The transport pot in the new infrastructure fund includes £1.1bn to reduce congestion and upgrade local roads, £1bn to invest in full-fibre broadband and trialling 5G networks and £2bn more for R&D by 2020/21.

Households’ helping hand.  Separately, for those renting, letting fees are set to be scrapped. For savers there’s a new bond from National Savings & Investment offering 2.2% interest. Fuel duty will be frozen for the seventh year in succession; helpful with inflation set to rise over the coming year.

Earnings and tax. Other measures had already been announced by the previous Chancellor. The National Living Wage will rise from £7.20 to £7.50 (although that’s slightly less than the £7.65 expected back in March). The personal allowance will rise to £11,500 by 2017/18 and on to £12,500 by 2020. The level of earnings at which the higher rate of income tax kicks in is set to rise to £50k by 2020. For businesses the government will stick to plans to cut corporation tax from 20% to 17%.

A word of caution. This is not the big spending splurge that many were forecasting a few months back. The infrastructure fund will raise public sector net investment to 2.3% of GDP by 2021. That only brings it back to where it was in 2010-2013. It averaged almost 5% between 1960 and 1980. Of course the Chancellor may be saving the more heavy artillery if and when economic conditions deteriorate. As the OBR itself stated, uncertainty is even higher than ever. Raising the UK’s poor productivity performance has proved a stubborn beast. It’s likely to need more investment thrown at it down the line.

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