The new reality and the final autumn statement

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Photo of Philip Hammond in Downing Street to illustrate the autumn statement

As the autumn statement acknowledged, the new chancellor can’t realistically balance the books by 2020. But he can at least aim to balance the primary budget, argues James Sproule

The new chancellor has given us his first and, as it turns out, last autumn statement with the announcement that from next year it will be scrapped and the main budget moved ahead of Christmas.

First things first: we are very happy to see a reduction in the number of fiscal events that the government of the day deems necessary. Business generally wants certainty and fewer opportunities to tinker with an already highly complex system are to be welcomed.

Looking to the longer term, Philip Hammond has now admitted what was perfectly obvious when looking at the data – that the budget was not going to be balanced by 2020 (just to add even more incredulity to the forecast, the back-loaded spending cuts are due to come in what will theoretically be an election year).

So if the deficit reduction plan proves too difficult in reality, is it time to consider a more realistic approach?

We think yes, and the answer could well be that we seek not to balance the budget, but to run a primary surplus, that is a balanced budget before debt interest payments are taken into account.

The total national debt is now £1.78trn, and for what it is worth, this is set to peak at 90.2 per cent of GDP in 2017-18.

More importantly, annual interest payments presently amount to £38bn, giving us an average interest rate of less than three per cent. If the rates in general were to rise in coming years, as we think likely, aiming for a primary balance would mean government spending plans would not be affected.

On current projections, a primary balance will be achieved in 2019-20, so giving the government a credible target for the end of this parliament.

Autumn statement and infrastructure

It is also worth noting that Theresa May’s administration is now making serious plans to invest in infrastructure.

These investments will in theory raise the UK’s economic capacity and hence its long-run sustainable rate of GDP growth. If – and it is a bigger if than we might wish – the returns from infrastructure investment exceed the capital cost, a primary budget balance could be sustainable.

Finally we note our 2017 predictions are off to a good start, with the Treasury already admitting that tax revenues have come in under the amount forecast. Asking why tax revenue forecasting is so poor is a natural question, to which we have two answers.

First, the tax yield for a given degree of economic activity used to be higher, so there could be an argument about mean reversion (or not, as we believe). Second, when the sums are difficult to add up, pretending that they do excuses you from making painful decisions about tax and spending.

So whatever the merits of more accurate forecasting, they are unlikely to trump the political realities of budget presentations, whether they should they should fall in autumn or in spring.

For the IoD’s full response to the autumn statement click here.

About author

James Sproule

James Sproule

James Sproule has been Chief Economist and Director of Policy for the Institute of Directors since January 2014. Prior to joining the IoD James led Accenture’s UK Research and Global Capital Markets Research. He started his financial career as a merchant bank economist working with both Bankers Trust, Deutsche Bank and Dresdner Kleinwort, and eventually helped to found the boutique bank Augusta and Company.

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