UK: Hammond rips up the rule book... and the Autumns Statement - ING

James Knightley, Senior Economist at ING, suggests that the Brexit means lower growth and sharply higher borrowing, which has given the UK Chancellor little room for manoeuvre and instead we have new fiscal rules, but like previous rules, they are there to be broken.

Key Quotes

“Chancellor Philip Hammond has delivered an Autumn Budget Statement that highlights the damage that Brexit will likely cause. He, together with the Office for Budget Responsibility’s forecasts, formally show that the UK will experience significantly slower growth, higher inflation, lower tax receipts and higher borrowing. Consequently, he has swept away his predecessor’s fiscal rule of seeking a fiscal surplus by the end of the current parliament (2020). Instead he is introducing three new fiscal rules:

1) Returning the government finances to balance as soon as possible in the next parliament with borrowing of less than 2% of GDP by the end of this parliament

2) Public Sector Net debt must be falling as a proportion of GDP by the end of the current parliament

3) Welfare spending to be kept below a cap set by the government and monitored by the OBR”

“In terms of policy measures, there is little of substance, which is unsurprising given the UK’s weaker fiscal position. The main initiative is to form a new national productivity investment fund worth £23bn. The focus is on innovation and infrastructure spending, the latter focusing on home building, road building and internet.”

“However, he did announce that this would be the last Autumn Statement. Instead the UK will just have an Autumn Budget from 2017, which will see policy changes and a Spring summary, which will provide an economic update, but no policy changes unless there is a material change in the UK’s economic circumstances.”

“Nonetheless, the tone of the statement can’t hide the economic headwinds the UK faces from Brexit. The OBR’s growth forecast of 1.4% for next year has been cut from the previous forecast of 2.2% and government borrowing revised up to 3.5% of GDP for 2016/17 versus 2.9% previously forecast. In fact government borrowing is now set to be £122bn higher over the next five years than predicted earlier this year with government debt now expected to reach 89.7% of GDP in 2018/19 versus the 79.9% projected previously.”

“We are more pessimistic on GDP growth than the government (ING = 0.8% for 2017) and also see upside risks to their inflation projections. This means that we see the potential for lower tax revenues and higher index linked government spending. As such, we think that the borrowing numbers are likely to be higher than the OBR predicts. Therefore, we see a real risk that these new rules, much like Gordon Brown’s Golden Rule and George Osborne’s fiscal rules, will be missed.”