Hammond bets on project spending to offset slowing growth

Posted on November 23, 2016

Philip Hammond has pledged to prepare Britain’s economy for leaving the EU by borrowing an extra £23bn over the next five years for new investment projects amid a sharp deterioration in public finances.

In his first Autumn Statement, the chancellor revealed official forecasts of lower growth following the vote for Brexit and much weaker tax revenues, leading to an expected increase in underlying public borrowing of about £100bn over the five-year period and constraining his options to boost the economy.

However, he said the infrastructure plan would “build an economy that works for everyone” and “prepare our economy to be resilient as we exit the EU”.

The chancellor lauded improved forecasts for growth in 2016, but thereafter the economic figures turned sour. The Office for Budget Responsibility’s official forecasts showed lower growth from 2017 and higher borrowing in the whole five-year forecasting period.

According to the OBR, growth in 2017 would 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.

Overall, the OBR estimated Britain’s decision to leave the EU would knock 2.4 per cent off the size of Britain’s economic potential over the next five years. This will be due to less trade, less investment and less migration.

By the end of the decade, public borrowing would be £30bn a year worse, according to the OBR, compared with the budget forecasts. It forecast that public sector debt would rise to 90.2 per cent of national income by 2017-18 but would start falling the following year.

Over the five-year forecast period to 2021, the government would have to borrow more than £120bn extra than it had planned in the March Budget.

Mr Hammond announced three new fiscal rules that give him greater “headroom” to deal with uncertainties.

First, public finances should balance as “early as possible” in the next parliament while in this parliament the cyclically adjusted deficit should be below 2 per cent of national income. Second, the “burden” of public sector debt should start 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.

In making its forecasts, the OBR said it assumed the UK would leave the EU in April 2019, two years after Article 50 is invoked by next March. It had asked the government for a formal statement on “its desired trade regime and system of migration control”. In response, the government had directed them to two public statements by the prime minister.

“This leaves us little the wiser as regards the choices and trade-offs that the government might make during the negotiations,” the OBR said, adding that due to this, it had “not attempted to predict the end-point of the negotiations”.

The chancellor said a national productivity investment fund would receive more than £23bn in funding over five years. “Raising productivity is essential for a high wage, high skill economy,” he 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 £23bn infrastructure fund, £1.1bn will go to English local transport infrastructure and more than £1bn to digital infrastructure.

Mr Hammond confirmed departments needed to find £3.5bn in additional cuts but would allow £1bn of these savings to be reinvested.

On the subject of taxation, he announced more generous transitional relief on business rates, helping companies in London, the south-east 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 £2bn over five years.

Mr Hammond froze fuel duty planned for April 2017, costing the exchequer about £500m a year. He confirmed measures to help reduce tenants’ letting fees, lower motor insurance policy costs and introduce new savings bonds through National Savings and Investment. The 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” that will respond 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 and economists expect higher import prices and uncertainties over Brexit to hit consumer spending and business investment next year.

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 7 basis points over the session after the announcement, having been 5 basis points higher 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 had earlier been down 0.2 per cent at $1.2313.

John McDonnell, the shadow chancellor, claimed Mr Hammond’s spending plans offered “no hope for the future” after six “wasted” years. He said the figures outlined in the Autumn Statement “speak for themselves”, with economic growth, wage growth and business investment down.

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