Brexit

Autumn Statement 2016: Brexit bites

Towards the end of his Autumn Statement, the Chancellor mis-spoke, referring to the Treasurer rather than the Treasury. His mistake revealed how he sees his role – not the alternative Prime Minister Chancellor favoured by Nigel Lawson, Gordon Brown and George Osborne, but that of the finance minister who tots up the columns and tweaks the subs. His most noteworthy announcement – ‘scrapping’ the Autumn Statement and moving the Budget  to the Autumn – reflected this less political approach to the job.

Gordon Brown as Chancellor reinstated the second major public Treasury set-piece parliamentary event and George Osborne opted to keep it because they saw it as an instrument of their power over the rest of government.

Both Brown and Osborne would use the Autumn Statement to make good news announcements about spending in other departments such as health and education. These were completely missing from today’s statement. Most of the good news had already been trailed by the Prime Minister in her speech to the CBI on Monday and in other media briefings. Corporation tax, infrastructure funding, 5G, money for housing were all briefed leaving the Chancellor’s main news story being the very poor debt, borrowing and tax revenue figures. Hammond forecast slower growth, higher inflation, weaker tax receipts and higher borrowing. His forecasts assume a worsening borrowing and debt position until 2017-18 but will start falling the following year.

He did present some limited tweaks. A £23bn fund was announced with a commitment to spend 1% of GDP thereafter on infrastructure and innovation. Investment in research and development will rise by £2bn to help close the productivity gap with the UK’s major economic competitors. £1.4bn was made available for affordable housing with an additional £2.4bn housing infrastructure fund to deliver new houses in areas of high demand. And he answered concerns that post-Osborne, the Northern Powerhouse had been downgraded by committing to new rail and infrastructure investment.

He also announced that HMRC would review the nature of self-employment. This reflects growing government concern about the so-called gig economy – where many people are classed as self-employed – and incorporation – where people set themselves up as businesses – which has led to a decline in PAYE receipts of £10.5bn in 2016/17.

The Chancellor has given himself flexibility with both a new welfare cap and a new Charter for Budget Responsibility with a much looser fiscal mandate. This gives him £56 billion more structural borrowing in 2020-21 than George Osborne was aiming for in March. Forecast revisions in the Autumn Statement have absorbed £20 billion of this, while the Chancellor has given away a further £9.5 billion, mostly in infrastructure spending. This leaves £26.5 billion spare, in case the structural outlook is worse than we think or he wants to announce more giveaways in the years to come.

The Brexit growth penalty is estimated by the Office of Budget Responsibility (OBR) at 2.4% over five years but with no clarity on when or how Brexit will happen, this could be regarded as optimistic. In its report, the OBR makes some attempts to quantify the impact which rests on the assumptions that the UK leaves the EU in April 2019 which assumes that the Article 50 negotiation proceeds to plan. The forecasts also assume that new trading arrangements with the EU and others slows the pace of import and export growth for the next 10 years. And that the UK adopts a tighter migration regime, but not sufficiently tight to reduce net inward migration to the desired ‘tens of thousands’. The OBR estimates the cost to the economy of reduced EU immigration over the ‘scorecard period’ (five years) as £16 billion.

Unlike previous Chancellors, there were no gimmicks. Philip Hammond is happy to be the bad news Chancellor. He didn’t seek to hide the gravity of the economic and budget forecasts. Austerity would continue, growth would slow, the deficit would grow as tax revenues declined. His weakened commitment to a budget surplus “as soon as practicable” in the next parliament looks designed to be broken. The forecasts are bad but the harder the Brexit, the worse they will be. Leave  the breezy optimism to the Brexiteers. In emphasising the bad news, he has strengthened his authority with his Cabinet colleagues for the difficult Brexit discussions to come.

By Lexington Communications