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Autumn Statement 2016: Bad numbers leave little room for a splurge

Philip Hammond

The latest in a series of columns from Adam Chester, head of economics,

Lloyds Bank Commercial Banking

Photos © Joel Chant - www.joelchant.com UNP- 34198 - Lloyds banking Group portraits, 10 Gresham St London

 

THE AUTUMN STATEMENT is the first set-piece budget event since the EU Referendum and, as such, the Office of Budget Responsibility’s updated five year economic forecasts will face particular scrutiny.

Most independent economic forecasters have substantially lowered their medium-term growth projections since June, reflecting the potential impact of prolonged uncertainty, particularly on investment.

They also reflect the more permanent ramifications of a less open economy for the UK’s long-term growth, with headwinds from lower immigration and weaker productivity.

While the economy’s recent resilience suggests little change to this year’s GDP forecast since the last projections of two per cent in March, forecasts for 2017 and 2018 are likely to be lowered substantially – we suspect from around two per cent to around 1.5%.

We also suspect a similar adjustment to the UK’s longer-term trend rate of growth, which is hugely important.

In short, with a permanently weaker economy, the tax take would be lower and public spending – on things like unemployment benefits – would be higher.

Pessimistic projections

If we are right, and the OBR adopts these more pessimistic projections, public borrowing could increase by more than £100bn over the next five years, requiring swingeing austerity measures for any hope of balancing the Budget in the medium term.

Yet, having promised a fiscal ‘reset’ and hinted at big plans for infrastructure spending and house building, the chancellor is unlikely to do anything to undermine the economy at this delicate time.

That said, with the economy faring well, there isn’t the same imperative for significant spending as there was immediately after the Referendum.

While we suspect the chancellor will find some money for infrastructure and housebuilding, as well as some giveaways for the middle-income households that Theresa May is seeking to appease, the overarching impression is likely to be the significant challenges as the UK enters new economic territory.

The implications for the pound are more ambiguous – ordinarily, rising budget deficits and fiscal stimulus should be positives for the UK currency, but the anticipated economic weakness should point to a weaker, not stronger, sterling.

Adam Chester is head of economics at Lloyds Bank Commercial Banking

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