Britain can expect slower growth, lower tax receipts, higher inflation and more borrowing in the wake of the vote for Brexit, the chancellor of the exchequer has said. In his autumn statement to MPs, Philip Hammond said that government borrowing over the next five years will be £122 billion (€144bn) higher than forecast last March – higher even than the £100 billion "Brexit black hole" predicted by City analysts.
Britain’s economy is now expected to grow by just 1.4 per cent next year, rather than by 2.2 per cent as forecast in March, rising to just 1.7 per cent in 2018. Mr Hammond said the slowdown was mainly due to greater uncertainty and higher inflation, both a result of the decision to leave the EU. The Office of Budget Responsibility (OBR) expects growth to improve from 2019 but to remain well below previous expectations for a number of years.
“While the OBR is clear that it cannot predict the deal the UK will strike with the EU, its current view is that the referendum decision means that potential growth over the forecast period is 2.4 percentage points lower than would otherwise have been the case,” Mr Hammond said.
Mr Hammond has abandoned the target of balancing the budget by 2020, replacing it with an ambition to reach a budget surplus “as soon as practicable”. The national debt will be close to £2 billion (€2.36bn) by 2020 and will reach 90 per cent of GDP next year, the highest figure for half a century.
Despite the gloomy fiscal outlook, Mr Hammond announced a £23 billion (€27bn) “national productivity fund”, part of which will be spent on improving infrastructure, as well as on research, development and innovation. He said that although the scale of Britain’s productivity gap was well known, it was nonetheless shocking.
“We lag the US and Germany by some 30 percentage points. But we also lag France by over 20 and Italy by eight [percentage points]. Which means in the real world, it takes a German worker four days to produce what we make in five; which means, in turn, that too many British workers work longer hours for lower pay than their counterparts,” he said.
The increase in infrastructure spending will mean bigger grants to the devolved administrations, with an extra £200 million (€236m) going to Northern Ireland.
Mr Hammond confirmed that Britain’s corporate tax rate would fall to 17 per cent by 2020 but held off from announcing a further cut as the prime minister, Theresa May, had hinted at earlier this week, to 15 per cent.
In advance of the statement, the government had promised to focus on those low- to middle-earners dubbed the “just about managing”. Mr Hammond announced some measures which could help such people, including a rise in the national living wage from £7.20 to £7.50 an hour and a ban on charging letting fees for rental properties.
Low earners who receive in-work benefits will also see a modest increase in their payments and fuel duty will remain frozen for the seventh successive year.
Main points: Forecasts
Although Mr Hammond confirmed measures to help reduce tenants’ letting fees, lower motor insurance policy costs and the introduction of new savings bonds through National Savings and Investments (NS&I), he said he wanted to maintain budgetary prudence and was severely constrained by cuts in official economic forecasts following the vote for Brexit.
The chancellor lauded improved forecasts for growth in 2016, but thereafter the economic figures turn sour. The OBR official forecasts show lower growth from 2017 and higher borrowing in the whole five-year forecasting period.
According to the OBR growth in 2017 will be 1.4 per cent, a figure revised down from a March forecast of 2.2 per cent on the back of greater uncertainty hitting business investment and higher inflation reducing consumer spending. The forecast for growth in 2018 has been reduced to 1.7 per cent from a March estimate of 2.1 per cent.
By the end of the decade, public borrowing will be £30 billion a year worse, according to the OBR, compared with the budget forecasts. It forecast that public sector debt will rise to 90.2 per cent of national income by 2017-18 but will start falling the following year.
Over the five-year forecast period to 2021, the government will have to borrow over £120 billion more than it had planned in the March budget.
Rules Mr Hammond announced three new fiscal rules that are much less stringent giving him greater “headroom” to deal with uncertainties. Public finances should balance as “early as possible” in the next parliament, and in this parliament
the cyclically adjusted deficit should be below 2 per cent of national income.
Second, the “burden” of public sector debt should be falling by the end of this parliament and third, there will be a new cap on total welfare spending.
Additional infrastructure investment will be funded by higher borrowing but day-to-day spending pledges will be funded by higher taxes, Mr Hammond said.
A national productivity investment fund will receive more than £23 billion in funding over five years.
“Raising productivity is essential for a high wage, high skill economy,” the chancellor said.
Part of this will be used to fund infrastructure to unlock land so new housing can be built. Annual capital spending on housing will more than double from the previous plan.
Of the £23 billion infrastructure fund, £1.1 billion will go to English local transport infrastructure and more than £1 billion to digital infrastructure.
Mr Hammond confirmed departments need to find £3.5 billion in additional cuts but will allow £1 billion of these savings to be reinvested.
Taxation On the subject of taxation,
Mr Hammond announced more generous transitional relief on business rates, helping companies in London, the southeast of England and in rural areas.
The government will crack down on “salary sacrifice” programmes but pensions, childcare, ultra low-emission cars and cycle-to-work schemes will be exempt. There is a new tax evasion and avoidance package set to raise £2 billion over five years.
Mr Hammond froze fuel duty planned for April 2017, costing the exchequer about £500 million a year. A new savings bond that will be sold through the NS&I will pay 2.2 per cent gross interest over a three-year term.
The chancellor also said he would abolish the autumn statement. Instead, there would be a full autumn budget and a “spring statement” which will reply to the OBR’s forecasts but will not be a “major fiscal event”.
Britain’s economy has performed better than expected since the Brexit vote as consumer confidence and spending have held up so far.
Financial markets, however, have been less sanguine with the pound falling 12 per cent against Britain’s main trading partners. Economists expect higher import prices and uncertainties over Brexit to hit consumer spending and business investment next year.
Borrowing
The yield on the UK’s benchmark 10-year sovereign debt ticked up to 1.43 per cent after the chancellor revealed increased public sector net borrowing requirements. The yield, which rises when investors reduce their exposure to the debt, was up seven basis points over the session after the announcement, having been up five basis points beforehand.
The pound has moved up from earlier intraday losses during the speech to reach $1.2422, leaving it at the flatline for the day. It has been down 0.2 per cent at $1.2313 earlier.
On equity markets, the UK-focused FTSE 250 has extended earlier gains and was 0.4 per cent higher to 17,755.54. Transport stocks are heading north following news of an extra £1.1 billion for local transport networks. Stagecoach and Go-Ahead Group, both transport operators, are up just over 2 per cent.
(Additonal reporting Copyright The Financial Times Limited 2016)
