Philip Hammond’s first (and last) Autumn Statement will have disappointed those hoping for a bold “reset” of fiscal policy.
Indeed, the big picture is that the economy is still set for quite a harsh bout of austerity over the next few years.
Admittedly, the Chancellor had the difficult challenge of trying to appear fiscally responsible while providing the economy with some support in the wake of the Brexit vote.
As it happens, the economic forecasts provided by the independent Office for Budget Responsibility were not quite as gloomy as most had expected.
It predicted that economic growth would slow from about 2% this year to 1.4% next year, before recovering to 2% again by the end of the decade. So much for a post-Brexit recession then…
“These forecasts are highly uncertain at the moment, as they rest upon a series of assumptions about when the UK actually leaves the EU and what the impact will be on trade and migration”
Of course, these forecasts are highly uncertain at the moment, as they rest upon a series of assumptions about when the UK actually leaves the EU and what the impact will be on trade and migration.
Nonetheless, the forecasts showed a hit to the economy of about 2.4 percentage points relative to where it would have been if we had voted to remain.
And this fed through to higher borrowing – about £59bn of which is directly related to the decision to leave the EU.
Rather than try to offset this with extra austerity, the Chancellor allowed borrowing to be higher than previously forecast.
This meant drawing up a new set of “fiscal rules”, as there was no way that he would meet George Osborne’s previous rule of achieving a budget surplus in 2019-20.
The new rules allow the Chancellor a bit more flexibility to respond to any weakness in the economy. And they allow him to provide a bit of support in the near term.
But this support was fairly small in the grand scheme of things. The fiscal giveaway in 2017-18 was equivalent to a paltry 0.2% of GDP, building to 0.4% of GDP in the later years of the parliament.
What’s more, from a retailer’s perspective, it is worth noting that more than half of the giveaways reflected increased investment spending.
The main measure to help the so-called “JAMs” (just-about-managing) was a modest reduction in Osborne’s planned cuts to universal credit. The 2% reduction in the benefits taper rate is hardly a game-changer.
Meanwhile, the fuel-duty freeze came as no surprise, the increase in the National Living Wage was less than previously forecast in order to achieve the target of 60% median earnings by 2020, and the increase in the personal allowance did not go over and above what had already been announced.
Overall, then, fiscal policy is still set to be a drag on the economy over the next few years. The chart below shows the fiscal stance – the further below the zero line, the harsher austerity is in any given year.
As it shows, the fiscal stance isn’t that much different from previously planned.
It is a good job that the Chancellor has given himself room to manoeuvre in future – if consumer spending were to weaken significantly as inflation rises and eats into consumers’ disposable incomes, he might need to use it.
- Paul Hollingsworth is UK economist at Capital Economics