Preparing the UK economy for a post-Brexit future
Brexit pervaded Philip Hammond’s first – and last – Autumn Statement as Chancellor of the Exchequer. While unveiling a raft of spending plans on transport, infrastructure and housing, he emphasised Brexit’s potential impact upon the UK’s finances, providing a downbeat assessment of the UK’s economic outlook and underlining the uncertainties clouding the UK’s future path.
Borrowing is set to soar
Blaming Brexit for the downturn in expectations, the Chancellor warned that the UK’s financial position has deteriorated and the Government will have to borrow over £120 billion more than it calculated in March 2016. Public sector net debt is forecast to rise from 84.2% of GDP last year to 87.3% of GDP this year, peaking at 90.2% in 2017-18. Public spending is predicted to fall to 40% of GDP this year, compared with a level of 45% in 2010.
The Office for Budget Responsibility (OBR) predicts that borrowing will reach £68.2 billion this year, falling to £59 billion next year and £46.5 billion in 2018-19. The Chancellor warned that the deficit will not be cleared by the previous target date of 2020, but pledged to clear it “as early as possible” after that. Whereas in March, the UK had been predicted to achieve a surplus of £10.4 billion by 2019-20, the UK is now expected to borrow £21.9 billion during that period.
A gloomy economic picture
The OBR raised its forecast for economic expansion in 2016 from 2% to 2.1%, but cut its prediction for growth in 2017 from 2.2% to 1.4%. Looking further ahead, the UK economy is expected to grow by 1.7% in 2018, 2.1% in 2019 and 2020, and 2% in 2021. According to the OBR, the UK’s economic growth will be 2.4% lower over the next five years because of Brexit.
The OBR’s new estimates were formulated on the assumption that the UK will quit the EU in April 2019, based on Prime Minister Theresa May’s target to invoke Article 50 by the end of March 2017. Although the OBR had requested more clarity from the Government over its plans for trade and migration, it remains “little the wiser” and was therefore unable to predict the “end-point of the negotiations”. Nevertheless, the OBR believes that changes to trading agreements could curb growth in the UK’s export and import activity for the next ten years, and growth in real earnings is expected to lag inflation.
Changes to taxation, pay and welfare
The Chancellor increased the tax-free personal allowance from £11,000 to £11,500 from April 2017; he intends to raise the threshold to £12,500 by the end of Parliament, after which it will rise in line with inflation. The income-tax threshold for higher-rate taxpayers should increase to £50,000 by the end of Parliament. Insurance premium tax will increase from 10% to 12% from June 2017. He announced curbs on “salary sacrifice” schemes, with exceptions for ultra-low emission cars, pension contributions, childcare costs, and the cycle-to-work scheme. The scheduled increase in fuel duty was cancelled for a seventh consecutive year.
The National Living Wage will rise from £7.20 per hour to £7.50 per hour, to take effect in April 2017. National Insurance thresholds for employees and employers are to be aligned at £157 per week. The taper rate for Universal Credit will be reduced from 65% to 63% from April 2017.
Support for housing
The Chancellor revealed £3.7 billion-worth of fresh spending on housing. A Housing Infrastructure Fund of £2.3 billion will be created to help deliver up to 100,000 new homes in areas of high demand, with a further £1.4 billion to provide 40,000 additional affordable homes. Elsewhere, he announced a ban on fees charged to tenants by letting agents; however, the news was greeted with scepticism from those who believe that this will result in an increase in rents.
Streamlining fiscal events
The Autumn Statement and Spring Budget are to be scrapped. From 2017, the Budget will take place in the autumn; from 2018, a brief “Spring Statement” will allow the Government to respond to the OBR’s updated forecasts. The changes were greeted enthusiastically by business groups.
Room for manoeuvre
The Confederation of British Industry (CBI) described the Autumn Statement as a “pragmatic down-payment on future productivity growth”, but urged the Chancellor to maintain a “watching brief on the challenges created by higher inflation and uncertainty weighing on near-term business investment”. Meanwhile, the British Chambers of Commerce (BCC) hailed the Statement as “responsible, solid and focused”.
Mr Hammond insisted that June’s unexpected Brexit vote had made it “more urgent than ever” to tackle the UK’s long-term weaknesses, including the productivity gap, the shortage in housing, and imbalances in economic growth and prosperity. Looking ahead, he intends to pursue three key fiscal rules: to balance the books “as early as possible in the next Parliament; for public sector net debt to be falling as a share of GDP by the end of Parliament; and for welfare spending to be within a cap. For now, given the backdrop of uncertainty, he appears to be treading a cautious line in order to provide himself with maximum flexibility in future.
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