As Lewis Carroll put it, jam tomorrow and jam yesterday but never jam today. But leaks from Downing Street suggest that Philip Hammond’s Autumn Statement next Wednesday will target the “Jams” today – those just about managing. Measures will include promised increases in income tax allowances (to £12,500 for the basic rate), a freeze in fuel duty, further childcare subsidies and so on. What about the big picture though?
It’s The Economy, Stupid. UK public finances depend heavily upon the health of the economy. Strong growth boost income taxes and VAT while low inflation holds down inflation-linked spending and interest payments.
In the near term, the news is good. The economy grew by a better than expected 0.5% in the third quarter and inflation was back below 1% in October, although the archaic RPI measure was 2%. However, it seems very likely that growth will slow and inflation rise next year. The table shows the Office for Budget Responsibility (OBR) forecast in March versus the average of independent forecasters then and now.
There are two lessons here. First, the OBR tends to be pretty close to the consensus. One benefit of an independent budget think-tank is that the chancellor is no longer tempted to massage the numbers.
Second, the independent forecasters have nearly halved their 2017 growth forecast, slashing it from 2.1% to 1.1% over the past six months. They have also raised their inflation forecast substantially, from 1.8% to 2.7%. Rightly or wrongly – and these are highly uncertain forecasts – the UK decision to leave the EU is the key reason for the changes.
And The Consequence Is … The OBR is sure to forecast higher public sector borrowing figures next week than it did in March. And, unfortunately, the starting point has worsened. In March the then Chancellor, George Osborne, expected a deficit of £72.2bn in 2015-16 and £55.5bn in 2016-17. Well, the outturn for 2015-16 was higher at £76.0bn and the deficit in the first six months of 2016-17 is only £2.3bn lower than a year earlier.
The Institute for Fiscal Studies does a thorough job analysing Britain’s public finances and thinks the deficit will be £60.5bn in 2016-17 falling to £47.3bn in 2017-18. That looks optimistic to us, which just goes to illustrate Mr Hammond’s difficult balancing act.
Likely Outturn. Look out for three aspects of the Autumn Statement. The first is a sense of medium term direction. His predecessor had an addictive urge to meddle and micro-manage. Mr Hammond may take the opportunity to set out a more sober, medium term view. Some sign of sensible fiscal rules would be welcome.
The second is a moderate boost for the economy now. Extra infrastructure spending would be better than tax cuts but this is difficult to do because many projects have little immediate impact
The third is keeping some budgetary firepower for March. The UK economy remains in reasonable shape, so it makes sense to avoid big measures now in case they are needed in the March 2017 budget statement.
Our investment strategy committee, which consists of seasoned strategists and investment managers, meets regularly to review asset allocation, geographical spread, sector preferences and key global market drivers and our economist produces research and views on global economies which complement this process.
Our quarterly report presents our views on the world economic outlook and equity, fixed income and foreign exchange markets. Please click the link to download.
