Hammond loosens purse strings to beat the Brexit blues

Chancellor Philip Hammond delivering the Autumn Statement in the House of Commons.

The chancellor’s Autumn Statement, delivered to MPs in parliament today, put some flesh on the government’s plans to rein in austerity, writes Christopher Papadopoullos.

The Autumn Statement was the first chance for the government to outline in detail its macroeconomic vision for the UK. Talk of an industrial strategy and an easing up on fiscal austerity were finally put into solid plans. 

“My style will of course differ from his,” Hammond said after praising his predecessor. Indeed it will, George Osborne’s three fiscal rules have been completely rewritten. The goal of balancing the books has been pushed back another five years to the end of next parliament. And debt as a percentage of GDP will need now only fall in the final year of parliament, rather than fall every year of parliament. The welfare cap has also been delayed to the start of next parliament. 

The main fiscal hand-outs are a variety of investments in infrastructure. And as part of a broader commitment to improve the UK’s slow growth in worker productivity, Hammond has told the National Infrastructure Commission to make its recommendations for future projects on the basis that public infrastructure investment will be between 1 and 1.2 per cent of GDP going forward. 

The economic outlook

The economic picture has become gloomier. In its March forecasts the government’s fiscal watchdog, the Office for Budget Responsibility (OBR),  expected the economy to grow 2% this year, 2.2% in 2017, and 2.1% in 2018.

The OBR has actually increased its forecast for this year to 2.1 per cent. However, economic growth will slow to 1.4 per cent next year before rising to 1.7 per cent in 2018 and 2.1 per cent in 2019.

The unemployment rate fell to 4.8 per cent in the three months to September, the lowest since 2005. However, this is now expected to rise to 5.2 per cent next year and 5.5 per cent in 2018.

Inflation is forecast to steadily rise on the back of the fall in the value of pound and is expected to reach 2% next year.

Tax and spending

With this gloomier outlook in mind, the OBR has knocked £44.3bn off the amount of tax it expects the treasury will receive by the end of the current parliament in 2020, before taking into account any measures in outlined in the Autumn Statement.

Both consumers and businesses are expected to slow their spending, hitting a range of tax receipts, especially income tax. Consumers are expected to be hit by rising inflation, while businesses are expected to put investment projects on hold due to uncertainty over our future relationship with the EU.

But rather than reining in spending as his predecessor would likely have done, total expenditure is forecast to be £47.9bn higher over the remainder of the current parliament. 

UK productivity, Hammond noted, is well below that of the US and many of our European neighbours. His spending plans are both an attempt to offset a near-term slowdown in the economy, but also to address the longer term issue of the so-called productivity puzzle.

Hammond announced the creation of a national productivity investment fund worth £23bn, which includes plans to splash out on transport, digital communications, research and development, and housing. 

Debt and the deficit

Theresa May had already abandoned Osborne’s promise to run a budget surplus by 2020, but had given little insight as to what the government’s new approach to the budget deficit would be. It has decided to put budget balancing plans on the back burner.

The budget deficit reached £76bn in the year to April 2016. In March, the OBR forecast £56bn for this year’s borrowing figures, but this has now been hiked to £68bn. The £10.1bn surplus by 2019-20 that was projected in March is now a £21.9bn deficit.

Rather than falling every year for the next five years, the UK’s public sector debt-to-GDP ratio will peak at £90.4bn in 2017-18 before falling steadily to £88bn in 2019-20, the final year of parliament.