Shifting the dial on the public finances

23 Nov 16

Philip Hammond went into this Autumn Statement with little room for manoeuvre but there were some telling tweaks

One of the biggest unknowns coming out of June’s referendum was the impact of Brexit on the public finances. Today, the chancellor provided an answer.

By the end of the Parliament, slower growth will drive up net borrowing by £20bn – a bad, but not terrible, adjustment. Fiscal events in November 2011 and December 2012 saw cuts to growth forecasts double the size of today’s. And in December 2013 the chancellor unveiled a similar revision to net borrowing, but in the opposite direction.

Nonetheless, the changing fiscal outlook has been enough to shift the dial on two key measures.

First, George Osborne’s precarious target of delivering a budget surplus by 2019-20. The OBR’s revisions now mean that, even after a decade of fiscal consolidation, the country will still be borrowing £20bn by the end of the Parliament.

Second, the debt target. Prior to the referendum, the Treasury was gambling on debt as a percentage of GDP falling in every year of this Parliament. Government will now have to wait until 2018-19 before this objective is realised, with debt set to peak at 90.2% – a level not seen since the 1950s.

With two fiscal rules broken, the chancellor followed the now time-honoured tradition of creating some new ones. The updated remit states that the structural deficit will have to be below 2% of GDP by 2020-21, while public sector net debt needs to start falling by 2020-21. Whether this new framework will actually be adhered to is anyone’s guess.

A relaxed fiscal remit allowed the chancellor to take some steps to shore up growth, with the £23bn National Productivity Investment Fund likely to attract the most attention. But there was no room for reversing the highly controversial cuts to Universal Credit. Yes, reducing the taper rate will give a targeted tax cut to those on in-work benefits. But this will not be enough to offset the forthcoming reductions to work allowances – the amount of money claimants will be able to earn before their benefits begin to be withdrawn.

On the spending side, perhaps the most significant development concerned something the chancellor didn’t explicitly say. Having reiterated his government’s commitment to the triple lock, Philip Hammond noted that the policy will be reviewed in light of the evolving fiscal position at the next spending review. The door is now open for the Conservatives to extract themselves from a policy that represents one of the biggest threats to fiscal sustainability.

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