The Chancellor’s first Autumn statement had some bad news on the economic outlook and the public finances, but the government’s response to this – prioritising investment to support productivity, regional growth and housing – is likely to receive a positive reaction from many businesses.
First the good news…
New government, new Chancellor, same opening gambit. Philip Hammond began his speech by announcing that the Office for Budget Responsibility expects the UK to be the fastest growth advanced economy this year, with GDP expanding by 2.1% - slightly stronger than its forecast in March this year.
And that was pretty much it for the good news. Next year and in 2018, growth will be weaker (1.4% and 1.7% respectively) as inflation bites into real income growth and holds down consumer spending, while Brexit-related uncertainty drags on investment. Still – could be worse, we could have Italian growth rates.
The public finance forecasts, however, probably wouldn’t fare too well in any international comparison. Borrowing (PSNB) is expected to continue to fall, but not as fast as expected, thanks to weaker tax receipts and a bit more spending (more on that in a bit). This means that total borrowing over the forecast period (2016/7 – 2020/21) is now expected to be £122bn higher than in March.
In a fairly pragmatic move, the Chancellor formally ditched the ambition for a budget surplus by the end of this parliament and effectively cleared the decks of bad news with a revised set of fiscal rules. These aim for a surplus in the next parliament; a cyclically adjusted budget deficit of less than 2% by 2020 and a revised welfare cap. All of which appear to be realistic ambitions, while providing some flexibility should growth take a more dramatic turn over the next couple of years.
Extra spending – what on?
So that’s the numbers.
The meat of these events is always in the policy detail. The Chancellor also made early mention of how this statement was supporting government priorities of productivity, housing and regional growth.
There were a lot more big numbers, the biggest one being the announcement of a £23bn National Productivity Investment Fund (NPIF). The most frequently asked question thus far seems to be – what is it? Essentially, it isn’t a long Treasury compiled list of measures, but rather a significant investment commitment in housing (£8.2bn); transport (£3bn); digital infrastructure (0.7bn; research and development (£4.7bn) and long-term investment – beyond 2021 of £7bn.
This lines up with our calls ahead of the statement for a “moderate fiscal stimulus package aimed at boosting innovation and export support for UK manufacturers, removing bottlenecks holding back capital investment and pushing through with major infrastructure decisions.”
Additionally, there were some smaller scale commitments that could impact on business – including more resources for UKEF and the British Business Bank; the announcement of a planned review of the R&D tax credit and the allocation of resources through the Local Growth Fund – further details to follow.
Again, this feel less about small scale tweaking and more like the government giving more gas to priorities in support of more innovation, exports and business growth and the next tranche of action on devolution.
The small print – someone’s paying for this
While some of this additional investment is coming through more borrowing, there were also some tax raising measures in the mix too. The biggest revenue raiser was an increase in Insurance Premium Tax, which is set to bring in around £4bn in the next five years, followed by another £2bn from action to tackle tax evasion and avoidance.
Where’s the rabbit?
Some people may have had the Chancellor pegged as too sensible and straight laced to get into gimmicks in his inaugural statement (though he proved he’s got a few good one-liners up his sleeve).
But he did indeed have a big, fluffy rabbit to reveal. It wasn’t succumbing to the temptation of another tasty tax cut, rather the more significant move of halving the number of fiscal events from 2018. From then on there will be ONE Autumn Budget and a response to the OBR forecasts in the spring. This is good (not just for the people who have to pull together recommendations for the event), but reduces some of the, arguably, needless fine-tuning that adds to the churn of tax policy making and instability in decision making for businesses.
Marks out of 10?
Come on – we don’t do that on this blog.
But our response to this statement – in terms of the overarching approach of a modest fiscal stimulus, focused in a small number of priority areas that will make progress on increasing the competitiveness of the post-Brexit business environment and deliver improvements in our infrastructure – is more positive than, perhaps, recent statements.
We scored some lobbying wins, but there are still areas that we’ll continue to look for change – notably in business rates and low carbon energy generation. We will also want to see the three top line ambitions of improving productivity, regional growth and housing become consistent themes for this Chancellor, rather than ones that change with every statement.
We’ll also want to work closely with members as HM Treasury reviews the R&D tax credit and looks at delivery of digital infrastructure priorities. If you have views on these or any other aspects of the autumn statement – get in touch (email@example.com).