The Autumn Statement is dead, long live the Autumn Budget
23 November 2016
Peter Spencer, chief economic advisor to the EY ITEM Club comments
As we thought, the strength of the economy following the EU Referendum vote has allowed both the OBR and the Chancellor to approach the Autumn Statement cautiously. Neither wanted to be seen as over-reacting to the uncertainty surrounding the position of the UK following the vote.
The OBR’s GDP forecast was revised up to 2.1% for this year, reflecting the strength of the economy. The forecast for next year was reduced to 1.4%, down from the 2.2% previously forecast at Budget time. This figure is above the consensus of around 1% for 2017, although we think the risk of another downgrade at the next Budget seems low given the continued momentum in the economy.
The OBR were more negative about the longer term threat. Indeed, it tackled this issue head-on by offering the view that its forecast for potential output at the end of the forecast horizon would have been 2.4% higher had the UK voted to remain, largely as a result of weaker capital spending and higher immigration. They argued that persistently high levels of inward migration would have led them to use the ‘high variant’ of the ONS population projections rather than the ‘principal’ variant that it used in March (and still uses). Compared to its Budget forecast, the downward GDP revisions were smaller, adding up to 1.1% by 2021.
Unfortunately, the underlying strength of the economy has not translated into tax revenues in recent years, and taking these unfavourable trends and the Chancellor’s policy measures into account, the OBR forecast another deterioration in government borrowing, adding up to £122b over the next five years. The target for a fiscal surplus had to be postponed from the end of this Parliament to ‘the earliest possible date’ in the next. It was however buttressed by targets for a cyclically-adjusted deficit of less than 2% and a fall in debt relative to GDP, both in 2020-21.
The strength of the economy removed pressure on the Chancellor to take aggressive action at this stage. However, in view of the risk to investment decisions, it is perhaps surprising that there was not more support for companies. In fact, business taxation, including employer National Insurance Contributions, will rise as a result of this statement.
The Chancellor seemed very confident about the strength of the economy, but perhaps he is expecting this strength to fade and keeping what little powder he has for the Budget. The short-run impact of this package on the economy will be small, with most of the big numbers on infrastructure spending and the like coming through in the next Parliament. Most of the key elements had been flagged up in advance.
Having said that, the Chancellor did use his speech to announce some important innovations, including an extension of the comprehensive spending review to the end of the next parliament. The big surprise was as usual kept secret right until the end of the statement. Many thought this would be the last Autumn Statement, but no one thought it would be replaced in future by an Autumn Budget, with the 2018 and subsequent Spring Budgets relegated to simple statements. This reform will make it difficult to prevent forestalling of big tax changes. With the road ahead so uncertain, it remains to be seen whether the Chancellor will be able to stick to his ambition of avoiding fiscal surprises in the spring.