Ernst & Young ITEM Club comments on the Autumn Statement
Andrew Goodwin, Senior Advisor to Ernst & Young ITEM Club comments on the Autumn Statement:
"This was a Budget in all but name, with a long list of policy announcements. That the OBR’s forecasts allowed the Chancellor to make it fiscally neutral was something of a pleasant surprise given the deterioration in the economic outlook since the Budget and the deep downgrades to the growth forecasts."
Commentary on the forecasts:
"The revisions to the growth forecasts look sensible and bring them closer into line with both our forecasts and the market consensus. Sense-checking the forecasts for the public finances has been made virtually impossible by all of the statistical fudges around the APF proceeds and the changes to the arrangements around the Royal Mail pension fund, Bradford & Bingley and Northern Rock.
"But the judgement on the all-important fiscal mandate appears to be driven not by the intricacies of the public finances forecasts, but by the OBR’s volte-face on the output gap. Last year the OBR had attributed the deterioration of the public finances to structural factors but, despite an almost identical backdrop, they have decided that this year it is all down to cyclical factors. On its own, the conclusion that the OBR has come to this year looks eminently sensible and chimes in with our reading of what has happened. But given that it runs contrary to the precedent they had set last year and contradicts the methodology that the OBR had established, it is bound to raise some difficult questions. It also makes forecasting the future behaviour of the OBR more challenging."
Commentary on policy:
"Though there was a large number of policy announcements, we were left with the impression that they will not add up to very much in terms of promoting growth.
"The greater focus on capital spending is right. But we feel that he could have increased capital spending by more and done so without cutting current spending. The impact on growth from these measures will be negligible and it does represent an opportunity missed.
"The decision to push the target date for the supplementary target back by a year looks sensible. However, the Chancellor will be crossing his fingers that this set of OBR forecasts proves to be accurate, as he has little leeway on the new forecasts and there is a risk that he may have to revisit the supplementary target soon.
"Given that the OBR forecasts show the Chancellor complying with the fiscal mandate a year ahead of schedule in 2016/17, and with almost the same margin for error as before, it is difficult to see why he has announced further austerity in 2017/18. We can only speculate that he is trying to build himself something of a buffer – in the event of further forecast downgrades in March this buffer will reduce the chances of the Chancellor having to announce yet more austerity measures in the Budget."