TheCityUK's Autumn Statement analysis 2016

Although it is too early to assess definitively the economic impact of Brexit, it was inevitable that today’s Autumn Statement had as its backdrop the impending exit of the UK from the EU. In contrast to his predecessor’s focus on fiscal consolidation, Chancellor Philip Hammond delivered a Statement centred on medium-term economic stabilisation.

The de-emphasising of deficit reduction is driven as much by circumstance as by changed policy priorities. According to the forecasts published today by the Office for Budget Responsibility, real GDP will grow by 1.4% in 2017 and 1.7% in 2018, compared with forecasts of 2.2% and 2.1%, respectively, made in the March 2016 Budget (in 2016 the economy is still expected to expand by around 2%). The current projections forecast slower growth in private consumption and investment—the main drivers of the UK economy—triggered by “higher uncertainty”.

Slower economic growth will result in tax revenue that is forecast to be £15bn lower by 2020 than previously anticipated. This in turn means that in contrast to the previous government’s commitment to achieving a budget surplus by 2018-19, today’s Autumn Statement included an announcement that the Government will no longer seek to deliver a surplus by that time, but will instead target a structural budget deficit equivalent to less than 2% of GDP by 2020. The OBR’s latest forecasts imply that the Government will meet this target; they show the cyclically-adjusted budget moving from a deficit of 2% of GDP in 2015 to a surplus of 1.5% in 2020. Public sector net borrowing is forecast to decline progressively from the equivalent of 4% of GDP in 2015 to 0.9% in 2020; this includes both current spending and investment. Public sector net debt is forecast to rise in 2016 and 2017, peaking at 90.2% in 2017—due in part to the expected sharp slowdown in growth—before falling gradually to 88% in 2019 and 84.8% in 2020.

The Chancellor had in recent weeks spoken of wanting to effect an economic ‘reset’. However, against the backdrop of weaker public-sector finances than previously projected, an announcement of a large fiscal-stimulus package would have undermined the desire to ensure the continued stability of financial markets. Stability is in any case not assured; gilt yields were at record lows in August and September, but have risen sharply since mid-October. Ordinarily, the Bank of England’s decision to cut its policy interest rate in August would have had a positive effect on the public finances by lowering government borrowing costs. The emphasis on stability is therefore paramount, and is shared by Government and the private-sector alike; in its representation to HM Treasury ahead of the Autumn Statement, TheCityUK had requested that the “Government…continue its focus on policies and clearly-calibrated courses of action that will be conducive to stabilising markets over the long term” [1].

With fiscal deficits serving as a constraint on government policy, TheCityUK also finds the Chancellor’s announcement of a new charter for public finances laudable. Research published by our Independent Economists Group emphasised that any fiscal “rules” should be flexible so as to avoid the risk of pro-cyclical economic policy[2]. As such, we judge the move to set more flexible fiscal targets commendable and appropriate given the unusually high level of uncertainty facing the UK and global economy at this time. 

Increased public-sector investment will serve as a form of mild fiscal stimulus. In addition to closing the deficit, government borrowing will also facilitate increased spending on infrastructure—both hard infrastructure such as transport networks, and digital infrastructure. Research published by TheCityUK notes that infrastructure spending can boost both near-term and longer-term economic output. We emphasise that such spending should be well-targeted, noting that the potential economic benefits “should [not] be taken as justification for indiscriminate and undifferentiated investment in infrastructure. A significant body of research confirms that with the benefit of hindsight, some infrastructure investment in developed countries could be described as wasteful, having added to the public-debt burden without necessarily having boosted a country’s long-term productive potential”[3].

In this context, we welcome the Chancellor’s announcement of a £23bn National Productivity Investment Fund to be spent on infrastructure and innovation.  The focus on local, well-targeted road and rail projects will help provide a boost to near-term output and employment, as well to longer-term productive potential. In addition, a focus on smaller-scale, local infrastructure—for example, the £5m to be invested in the Midlands Rail Hub—will help ensure that all the regions and nations of the UK help support overall economic growth.

Similarly, we applaud the promise of an additional £2bn per year to be invested in research & development (R&D) by 2020. R&D plays a crucial role in supporting both short-term and long-term economic growth, particularly in advanced services-oriented economies like the UK. UK spending on R&D was equivalent to only 1.7% of GDP in 2013, below the level in France (2.2%), Germany (2.8%) and the US (2.7%) The UK is also the only one of those four countries where R&D spending as a percentage of GDP fell between 2006 and 2013[4]. To complement the investment announced today, Government policy should also aim to improve public-private research collaboration and encourage the formation of innovation clusters where companies and public-sector institutions jointly work on research projects and seek funding. Increased funding alone will be insufficient to position the UK at the cutting edge of technology and innovation; this will require the development of regional clusters of expertise and next-generation technology skills.

Such skills are particularly important for the financial and related professional services industry. Remaining competitive as a global financial and related professional services centre means that the UK must build on its strengths in FinTech, and so we welcome the announcement that the Department for International Trade will provide £500,000 a year for FinTech specialists. TheCityUK has recommended that the UK-based financial and related professional industry work in partnership with the Government to help ensure that the UK has appropriate FinTech capabilities, networks and regulations[5], and this investment, as well as the establishment of regional FinTech envoys, will help ensure this goal.

TheCityUK’s representation to HM Treasury also suggested “proceeding judiciously with further reforms to tax policy”. On this measure, the decision to retain the already-scheduled reduction of the rate of corporation tax to 17% by April 2020 is to be commended. This will further increase the gap between the UK’s basic corporate tax rate and that of other G20 countries, thereby enhancing the country’s global competitiveness; the UK’s rate of 20% is below the OECD average of 24.85%, and lower than the rate currently levied by most G20 countries, including Germany (29.72%), Australia (30%), Japan (32.26%), France (33.3%), and the US (40%)[6]. Moreover, the UK will need to ensure that its overall business tax regime remains consistently attractive and designed to promote the success of large corporates and SMEs in the years ahead.

Today’s Statement also took aim at tax avoidance. TheCityUK has consistently put forward the view that firms must pay the tax for which they are legally liable, and we believe that the implementation of measures such as strengthening sanctions and deterrents against avoidance will reinforce the message that no companies are above the law.

 

[1] TheCityUK Autumn Statement representation 2016
[2] The Economics of Fiscal Policy, October 2015
[3] Long-Term Finance for Infrastructure and Growth Companies in Europe, March 2015
[4] World Bank data 
[5] For further discussion, see UK Financial and Related Professional Services: Meeting the Challenges and Delivering Opportunities, August 2016
[6] KPMG. Effective tax rates may differ from these headline rates