The 2016 Autumn Statement is this Wednesday. How are the economy and public finances performing? And what we might expect to hear from the Chancellor?
The current economic situation
The EU referendum has so far had little effect on overall economic growth. Consumer spending has continued to underpin growth, while business investment has been weak.
Forecasts for growth, however, are less optimistic. The steep fall in the pound following the referendum has increased import prices. This is starting to impact on prices along the supply chain. Economists expect the result to be consumer price inflation rising above 2% by mid-2017, and closer to 3% by end-2017.
Higher inflation would reduce the purchasing power of consumers, potentially leading to slower growth in their spending. This is expected to lead to more modest GDP growth in 2017 despite a potential boost to exports from sterling’s decline. Growth forecasts from private sector economists for 2018-2020 have also been lowered since the Budget in March. As a result, we can expect the Office for Budget Responsibility (OBR) to lower its growth forecasts as well.
Brexit-related uncertainty and prospects for lower growth led the Bank of England to cut interest rates in August. The Bank has also expanded its quantitative easing programme, whereby it creates new money in order to buy financial assets from financial institutions.
And what about public finances?
In 2015/16 the government had to borrow £76 billion to make up the difference between its spending and income. Despite halving since its 2009/10 peak the UK’s borrowing – often referred to as the deficit – remains large relative to other nations.
Since the EU referendum, forecasters have increased their estimates for government borrowing in response to predictions of lower economic growth. The OBR are expected to do the same.
At over 80% of GDP, public sector net debt – largely the stock of borrowing arising from past deficits – remains relatively high by recent and international standards. The OBR’s March 2016 forecast saw the debt-to-GDP ratio falling each year. Forecasts made, by other forecasters such as the Institute for Fiscal Studies, since the EU referendum have cast some doubt over whether the debt-to-GDP ratio will fall in each of the next five years.
Will we see new fiscal targets?
The Chancellor is set to drop, or amend, at least one of the Government’s three targets for the public finances in the Autumn Statement. The target to eliminate borrowing by 2019/20 – in other words, to reach a budget surplus – was abandoned following the EU referendum and is likely to be replaced with a different target. The Chancellor may also take the opportunity to change the debt target and welfare cap, both of which have already been breached.
The Chancellor has not said anything definitive on what the new targets might be. However, he has discussed some wider objectives for fiscal policy that the targets may reflect. The Chancellor: still wants to seek a budget surplus in the future; wants to control day-to-day spending and debt; and, may seek to find ‘headroom’ for a fiscal stimulus if the economy needs one. A fiscal stimulus would see the government increase spending or reduce taxes with the aim of stimulating economic growth.
There is more on this in our post from last week, Autumn Statement: a new target?
Infrastructure – a likely candidate for additional spending?
Many economists and industry bodies have been calling for the Government to increase spending on infrastructure. These calls are made against the backdrop of historically low government borrowing costs.
Infrastructure looks a likely candidate for additional spending if the Chancellor thinks the economy needs a fiscal stimulus – indeed, over the weekend reports in the media suggested that the Autumn Statement will include additional spending for Britain’s roads. The Chancellor has indicated that he favours targeted and time-limited increases in infrastructure spending.
This summary was originally published in the Library’s Autumn Statement background briefing.
The Library will publish a summary of the Autumn Statement on the evening of 23 November.
The Library has published an Autumn Statement edition of Economic Indicators.