A year is a long time in politics…
It feels like much longer than 12 months since the last Autumn Statement. Events in the UK and elsewhere mean we now face a very different economic outlook than that which confronted George Osborne in late 2015.
The EY ITEM Club Autumn Statement preview sets out very clearly the challenges facing the new Chancellor as he prepares for his first major set-piece economic policy event. Forecasts for UK economic growth are lower and more uncertain than only 12 months ago while public finances are under more strain, having weakened since the 2016 Budget. This will limit the freedom the Chancellor has to adjust policy. On the positive side, the resilient performance of the economy since the UK’s referendum on membership of the European Union (EU) means that there is less pressure to stimulate economic activity in the short-term.
Much has changed over the last 12 months in economic policy terms. The new Prime Minister has set out clear objectives to change the economy, including the introduction of an industrial strategy; the Chancellor has made clear he will relax the fiscal targets introduced by his predecessor; and, in recent weeks we have seen the Bank of England under pressure from some politicians to change its approach to monetary policy. Internationally, we have also seen a growing call for more expansive fiscal policies to take up some of the pressure on creating growth that monetary policy has been trying to achieve in recent years.
Expectations have been growing but there has been little detail provided on the changes to economic policy that we can expect. This is also true of the likely approach to negotiations with the EU that the UK will adopt. With the possible moves in both areas having now been openly discussed for several months but with very little detail available, the Autumn Statement has taken on increased significance. The Chancellor’s every word is sure to be scrutinised as the business and financial communities seek to develop their understanding of the future outlook.
…hence the Autumn Statement will be scrutinised for its wider implications…
The overall direction and specific initiatives announced in the Autumn Statement will provide the first clear steer we have on the future landscape. As the EY ITEM Club report illustrates, there are a range of possible policy options and the choices made will be informative. The key areas to listen out for and the associated implications of these are set out below:
► Reducing VAT: A move to cut the rate of VAT, even if temporary, will suggest the Chancellor is more concerned about the short-term economic outlook than he has revealed to date. This would boost consumers and ease the pressure on corporate margins but would be expensive.
► Working-age benefits: Any proposed reversal of the current policy on the uprating of working-age benefits would also hint at short-term concerns but would strongly demonstrate that the Government is serious about reshaping the economy to share the benefits of prosperity more widely.
► Commit to invest in infrastructure: On the spending side, attention will focus on any changes to spending plans and particularly the approach to infrastructure investment. While it is true that public finances are weaker than a year ago, the government can still borrow cheaply and increased investment would offset the expected slowdown in corporate investment as well as create a platform for future economic growth. A commitment to invest a fixed share of GDP, as suggested by the EY ITEM Club, would be a very positive statement of intent.
► Industrial strategy: Improved infrastructure will be a key component of any industrial strategy but it is also worth keeping an eye out for clues on other components such as incentives to invest in plant and equipment, funding for the regions, support for R&D and schemes to boost skills development in specific sectors or capabilities.
► Reducing corporation tax and help for sectors and investors: Finally, moves to reduce the rate of corporation tax or to provide specific forms of help to sectors or investors might provide a guide to the nervousness the administration feels about the vulnerability of specific sectors or foreign direct investment. The more specific the proposal, the greater the likelihood is that the Government sees a risk in a particular area. One example might be a cut in the 8% corporation tax surcharge paid by banks.
…as we look forward to 2017.
I have been a strong advocate of patience in an uncertain environment. Without the correct information, poor decisions are as likely as good ones. However, the landscape is becoming clearer; the pound seems to have found a new level and the Autumn Statement will provide a guide to future domestic policy and the economic outlook. 2017 will be an interesting and challenging year.