Jam tomorrow!

Professor of Economics, Robin Bladen-Hovell

Last Wednesday’s Autumn Statement was striking for its sobriety. Gone, largely, were the gimmicks that characterised previous Autumn Statements and rabbits were conspicuous by their absence from Philip Hammond’s first set piece.

The job, of course, was by no means easy. The austerity inheritance and recent adoption of the Brexit agenda saw to that. While the former continues to exert an unrelenting downward pressure on budgetary decisions, the latter has significantly increased the degree of uncertainty that surrounds the future thereby compounding the difficulty that the Chancellor faced in charting a prospective course for the economy. Added to this was the apparent desire to use the Autumn Statement as the first stage of a government make-over that seeks to associate the new government with more than austerity and Brexit, identifying the priorities of the new administration with the concerns of a poorly-defined group of low-to-medium income, in-work households classified as just-about-managing, or JAMs. Unsurprisingly, with so many competing claims, the resultant Autumn Statement offered relatively little to anyone.

As with all Autumn Statements it contained a variety of policy measures. The first and possibly the most important was the attempt to future-proof budgetary policy against the increase in uncertainty. This took the form of a significant relaxation of the budgetary framework within which government tax and spend decisions are taken together with the formal announcement that this would be the last Autumn Statement and that, from next year, it would be replaced by the Budget. The effect of this announcement is to provide the government next year with two opportunities to adjust tax and spending plans without either being necessarily perceived as an emergency response to changing economic conditions. Future-proofing the near term achieved. Over the longer-term, the commitment to reversing the effect of the financial crisis on the public purse during this parliament was relaxed to the point where the commitment has become simply lip service to the idea of there being a budgetary framework. To all intents and purposes the government can no longer be called for failing to achieve its targets because the targets themselves have conveniently all been moved into the next parliamentary period (2020/21). Moreover, the arbiter of whether these targets should change at any point before that date is the government itself.

Of course, much of this reflects the prospective effects of Brexit which, at present, are completely unknown. Fortunately, the economy has proven more robust since the referendum than was anticipated, with both exports and consumer spending stronger than expected. Background papers from the Office of Budget Responsibility (OBR) show total output growing over the year to the third quarter by 2.3%. However, this buoyancy has not translated into an improvement in government borrowing and the OBR predicts that government borrowing will continue to deteriorate, adding up over the next five years to a need to borrow some £122 billion more than previously predicted, with almost half of this increase due to Brexit itself.

Despite the improvement to exports, business investment declined in the third quarter reflecting the continuing effect of uncertainty on the sector and the prospects are for this weakness to spread more widely in 2017. Households, for example, are particularly vulnerable to the adverse effects of inflationary pressures that are currently building in the economy following the fall in sterling over the summer. Reflecting this, the OBR downgraded its forecast for output growth in 2017 to 1.4% which, while higher than the consensus forecast for the economy, is 0.8% lower than they predicted at the time of the Budget in March. Moreover, in a first-pass at quantifying the effect of Brexit over the longer term, the OBR also suggested that potential output for the economy will have grown by 2.4 percentage points less by 2020 than it would have done in the event of a vote to remain otherwise. It associates this weaker growth with two main factors: weaker investment and a reduction in immigration. However, in both cases the OBR acknowledged that considerable uncertainty remains.

In many respects, it was surprising that given the weakening business position, the Autumn Statement didn’t contain more assistance directed towards companies. Business taxation, including employer National Insurance contributions are scheduled to rise because of the decisions taken. Instead the corporate assistance appears to be primarily focused on the longer term – road, rail and broadband infrastructure – none of which will significantly impact in the short term. These investments, alongside investment in R&D and skills, are directed at improving productivity, an area where the UK has lagged the field for many years, reflecting the lack of a clear industrial strategy for the country. Recognising this lack is therefore welcome but much more is required before we can say that a major change in policy direction has occurred.

Another area where the Chancellor had to deliver was in relation to assistance for the just-about-managing households, or JAMs, whose prominence has risen in recent months on the back of commitments made by the Prime Minister. For this group the headlines included increases in the living wage from £7.20 to £7.50, adjustment to the rate at which benefits are withdrawn (the taper) under Universal Credit as income from work increases, together with a freeze on fuel duty and commitments to bear down on estate agent fees on those renting and raise the threshold for lower band income tax. However, these changes are dwarfed by the reduction in benefits of £3 billion that will impact on lower-middle income households in coming years since the effect of many of the measures announced fall largely on households who fall outside the JAM definition.

Taken together, the key points of interest in the Autumn Statement seem to be tacit acknowledgement by the Chancellor that the UK will pay a (potentially significant) price for Brexit. Economic momentum enabled the Chancellor to avoid making a major policy response to the referendum result in the short-term but nothing in the Autumn Statement prevents such a response being required in the future once the shape of the departure begins to emerge. As for the just-about-managing households, here it looks very much that, like Alice in Wonderland, it will be jam tomorrow.