Autumn statement will bring good news for UK economy, but don’t expect many giveaways with just £3bn in the Chancellor’s kitty

4 December 2013

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ITEM Club Autumn Statement special report

The UK can expect to hear good news when the Chancellor delivers his Autumn Statement speech on Thursday, with the Office for Budget Responsibility (OBR) predicted to upgrade GDP growth and cut its borrowing forecast, according to a new report from the EY ITEM Club.

After three successive quarters of strong growth, the EY ITEM Club’s Autumn Statement Preview report says that the OBR is likely to revise its GDP forecast to 1.4% for 2013 and 2.4% for 2014 - up from the 0.6% and 1.8% respectively it predicted in the March Budget. The EY ITEM Club says that improving tax revenues will also enable the OBR to cut its borrowing forecast from £120bn to £110bn.

However, the improving economic outlook is unlikely to translate into widespread giveaways. The EY ITEM Club says the Chancellor will only have £2–3bn at his disposal to fund tax cuts or spending increases.

Economic recovery is boosting UK tax revenues

According to the report, tax revenues for the first half of the year have come in £8.2bn ahead of the same period last year, accelerated by a strengthening labour market, a healthy high street and the housing market revival. The largest revenue increases have come from national insurance contributions (up £3.8bn from 2012), income tax (2.7bn), VAT (1.6bn) and stamp duties (£1.3bn).

As a result, the EY ITEM Club report expects the OBR to raise its tax revenue forecasts by £10bn, which it says will have a corresponding improvement on Government borrowing.

But the Chancellor’s war chest will remain light

Carl Astorri, senior economic advisor to the EY ITEM Club comments: “The recovery is picking up nicely but the improvements to the economic outlook are going to come with a caveat. The OBR is likely to attribute the bulk of the UK’s borrowing undershoot to cyclical factors, rather than the result of any underlying structural improvement in the public finances. This is going to leave the Chancellor with very little room for manoeuvre to fund tax or spending giveaways ahead of the 2015 election.”

Chris Sanger, global head of tax policy at EY added: “The Chancellor sees the tax system more as a tanker than a sail boat, and so his messages in the Autumn Statement are likely to be ‘steady as she goes’, rather than revealing a swift change of direction. As such, we can expect to hear a reiteration of  the Government’s commitment to the patent box regime and the 20% corporate tax rate, which reinforce the UK’s position as a great place to do business, particularly following the recent trade delegation to China.

“Any tax tinkering is likely to involve the introduction of tightly focussed, targeted tax incentives focussed on employment and training - both of which are consistent with the Government’s focus on job creation and growth. And the Chancellor may also attempt to smooth out some of the discrepancies in the personal tax system.

“Finally, although it’s perhaps a long shot, the Government may look at increasing tax incentives for companies investing in capital infrastructure to encourage businesses to start spending.”

Targeted policy initiatives would support consumer spending

With private sector earnings currently 10% below their pre-crisis peak and now back to 2003 levels, the EY ITEM Club says the Chancellor is right to use some of his fiscal wiggle room to ease the burden on UK households by introducing measures to reduce energy bills. Domestic energy bills have risen 160% over the last decade and currently account for over 4.6% of household’s spending compared to 3.1% in 2000. The EY ITEM Club estimates that the Governments widely trailed initiative, to reduce electricity and gas bills by £50 per household, will cost around £1bn to the Treasury coffers.

Astorri comments: “The economy’s return to growth has moved the fiscal debate on from austerity, to when the Government should start sharing the fruits of recovery. Given that households are experiencing something of a lost decade for earnings, this shift of emphasis is likely to have a strong resonance with hard-pressed voters.”

And a strong case remains for infrastructure investment to boost growth

The EY ITEM Club is also reiterating the case for increased infrastructure spending to boost UK growth – a policy initiative it has been consistently calling for over the last year. Of all the fiscal tools available, the report says capital spending is widely acknowledged to have the biggest economic impact. If calculations from the OBR hold true – that £1bn of capital spending boosts GDP by £1bn – a £10bn investment would add 0.5% to GDP each year.

To provide a short term economic boost, the EY ITEM Club says that the Government would need to look at projects where the planning and logistics have already been completed, such as repairing pot holes, building roads or even maintaining schools.

Building on the success of Help to Buy

The report is also calling for a boost to housing supply. While the EY ITEM Club says that fears of a housing market bubble are premature and misplaced, it believes that the Government has an opportunity to further build on the success of the Help to Buy scheme by increasing the availability of new property.

Astorri comments: “While Help to Buy is increasing demand, house building has fallen 47% since its pre-financial crisis peak in 2007 – the lowest level in over forty years. The Chancellor has a real opportunity to build on the momentum behind the housing market recovery by increasing supply. Initiatives such as speeding up the planning system, releasing unused Government land for development, or even providing the green light for the construction of new towns, could have a real impact.”

Maintaining the momentum

Concluding, Astorri added: “The UK’s economic recovery is firmly entrenched, but the challenge now is to maintain the momentum and to accelerate the pace of growth. Even with just a few coppers in the coffers, a carefully targeted investment injection by the Chancellor could have a significant impact.”