A few days after the EU referendum I was contacted by an analyst in New York to ask how the government was going to keep business confidence up. I pointed out that as the prime minister had just resigned we didn’t really have a government, and that summer recess meant it was hard to make tax announcements – as they needed to be made to parliament. But I said at the very least the Autumn Statement would probably be brought forward. I was wrong. It took a full five months, to the day, for the Chancellor to come to the dispatch box.
No wonder, when there is so little certainty as to the likely path of the UK economy in the years ahead. As the Office of Budget Responsibility itself points out, since the nature of the UK’s future trading relationship with the EU is unknown, it’s quite hard to make a forecast of how the economy will respond.
In the absence of that, they presume: business investment will fall; higher inflation will reduce household consumption; the cyclical upswing that was in force before the referendum has ended; the otherwise positive effect from higher migration will vanish; trade will reduce overall – and that the combined effect of these forces will reduce the rate at which the economy will grow from 2.2% to 1.4% in 2017. And then from 2.1% to 1.7% in 2018. A combined short-term Brexit impact of 1.4% of GDP, even before the longer term impact is taken into account.
That reduction in growth rates in itself is not good news for the public finances, since it reduces the expected tax take. But add on top of it the Chancellor’s decisions to spend a bit more, and the impact of the Bank of England’s asset-purchase decisions over the summer, and Hammond’s predecessor’s fiscal rules are all blown out of the window.
In fact, Britain’s pile of government debt, that has been growing since the financial crisis, is expected to continue its upward path to reach a massive 90% of GDP in the financial year 2017-18. By way of context, George Osborne based his entire austerity drive on a forecast of debt peaking at around 70% in 2013-14. Gordon Brown’s ‘golden rule’ was to keep it under 40%.
Unsurprisingly, Mr Hammond has changed his own fiscal rules to accommodate the new circumstances. They are now ‘much less constraining’ in the words of the OBR: debt is now permitted to keep rising till the end of the parliament and a structural budget deficit of 2% in 2020-21 is also permitted.
Not all of this new wriggle room has been used up yet, which is lucky because the current forecasts are unusually uncertain and also reflect some rather heroic assumptions. For example, that there will be no further opposition to the already-announced doubling of welfare cuts in this parliament, and cuts to departmental spending will be massive in the final year of the forecast. But given that our knowledge of the likely business environment is not even known in the year after next, perhaps this does not matter.
Faced with a deterioration in these headline indicators, it is perhaps no surprise that the new policies in the Autumn Statement were carefully designed to give something to each major interest group, and added up to a slight easing in the pace of austerity.
Savers were given an opportunity to lend to the government at an interest rate that looks attractive given what is currently available. Drivers got the now-ritualistic cancellation of a supposedly planned increase in fuel duty, couched as a response to Brexit-induced inflation that is expected to rise to 2.5% in 2018. Low earners got a slight reduction in the high marginal tax rates as tax credits taper off when earnings increase, coupled with the announcement of a higher minimum wage. Millennials were promised faster housebuilding and a clamp down on letting fees. The business lobby was reminded of the planned cuts to corporation tax and business rates and new investment in R&D. And a myriad of constituency MPs had the prospect of road and rail infrastructure improvements to champion.
Having made us wait for five months for an economic policy response to Brexit, there will now be two budgets next year; the last one in the spring followed by the first autumn budget this time next year. But if they are anything like this one, there will still be more that is uncertain in the UK economy than is known.
Kitty Ussher is Portland’s Chief Economic Adviser. She was City minister in the Treasury from 2007-08 and is also Managing Director of Tooley Street Research.