Autumn Statement: Economy — House of Lords, 2016-11-29
Topic: Macroeconomics
Francis Thomas Baring (Conservative, Centre-right): My Lords, it was extensively trailed that that the Autumn Statement would be peppered with bad news. Facing weak economic forecasts, the Chancellor refrained from indulging in fiscal gymnastics and instead set out a simple plan: the Government would borrow £122 billion more during this Parliament, including new spending, and £59 billion extra due to Brexit, and push deficit reduction beyond the next election, in contrast to George Osborne’s plans to get into surplus by 2019-20, which I always felt were unrealistic. I welcome the commitment to reduce the structural deficit to less than 2% by the end of this Parliament. The Chancellor will be giving out some £23 billion, mainly to invest in infrastructure; he will also be keeping £27 billion aside as a Brexit shock absorber, if he needs to turn on the spending taps ahead of the next election First, I will look at the economic forecasts for GDP growth in the light of the Statement. The good news, as the Chancellor said, is that the UK is forecast to be the fastest-growing G7 economy in 2016, and the third quarter annual GDP growth was 2%. The bad news is that the slump in sterling and Brexit uncertainty have caused the OBR 2017 and 2018 forecasts to be severely reduced, although they are unchanged for 2019 and 2020 On the public finances, the OBR’s forecasts show a deterioration since the Budget of 2016, due to disappointing tax revenues over the first half of this year, a weaker economic outlook weighing on receipts from income taxes, and higher spending by local authorities and public corporations and on welfare benefits. Compared with the OBR’s Budget 2016 forecast, borrowing is higher in every year and £32 billion higher in 2021-22, according to the Autumn Statement. Debt is expected to peak at over 90% of GDP in 2017-18, due to a combination of higher borrowing, lower asset sales and the impact of the Bank of England’s monetary policy operations. The Chancellor stated that he is determined to, "return the public finances to balance as soon as possible in the next Parliament, with an interim objective of reducing the structural deficit to less than 2% of GDP, and for debt as a percentage of GDP to be falling by the end of this Parliament" Public sector debt will, on the OBR’s forecast, top £1.9 trillion by the end of the decade, up from £500 billion 10 years ago and £1 trillion in 2010. As Martin Wolf of the FT said last Thursday, two of the three fiscal rules established by George Osborne have been broken. He failed to achieve public sector net debt falling as a share of national income every year. Also, he was unsuccessful in keeping welfare expenditure below a cap. Brexit has now killed the third, the legislated commitment to reach an overall budget surplus by 2019-20. Although the debt figures are mouth-wateringly high, the Chancellor is gambling that, as other major G7 countries also have very high levels of debt, the markets will take this calmly. The wild-card factor is whether the reappearance of higher than expected inflation—with the RPI forecast by the OBR to rise from 1.8% this year to 3.6% in mid-2018—coupled with prolonged trouble over Brexit will cause problems, for instance with gilt issuance, and upset his calculations. We have already seen signs of inflation price increases with sterling’s depreciation since Brexit One area where the forecasts look particularly gloomy is projected revenue, particularly from income and national insurance contributions. The OBR expects them to be much lower than had been thought in March, while corporation tax revenues are expected to be higher. The OBR has noticed that, in recent years, the Government are raising more than expected from corporation tax—and I welcome the plans to cut it further—but much less from income tax and national insurance contributions. One factor is that many more people are classifying themselves as businesses rather than workers. The rate of corporation tax is much lower than the top rate of income tax and this supports the Laffer curve theory that taxes can raise more revenue at reasonable lower levels. I praise the raising of the personal allowance for income tax but, like my noble friend Lady Noakes, I criticise the failure to cut the top rate of income tax from 45% to 40%. Stamp duty revenue projections are down. I also agree with my noble friend Lady Noakes’s criticism of this. When the former Chancellor raised rates to an unreasonable level, I entirely expected this to happen. Does the Minister accept that the rate is far too high at the top end? I also echo the criticisms of the treatment of buy-to-let stamp duty, as mentioned by my noble friend Lord Flight. I do not understand, from the receipts forecast table 4.6 of the OBR outlook, why tax revenues are going to increase from 2017 to 2019 when GDP growth is declining. Will the Minister explain this to me Moving on to the standard of living, rising inflation is expected to squeeze the purchasing power of people’s wages in real terms. As other noble Lords have mentioned, analysis by the Resolution Foundation shows that the outlook for family finances looks bleaker than the OBR’s forecast in March, with average real earnings set to be £830 lower by the end of 2020. As Paul Johnson, director of the Institute of Fiscal Studies, put it in the wake of the Autumn Statement: "Real wages will still be below the 2008 levels in 2021 … more than a decade without real earnings growth" Growth in real earnings is expected to be only 0.1% in 2017. The rise in the national living wage to £9 by 2020 will, according to the OBR, put upward pressure on the employment figures The subject of productivity was ably covered in the Autumn Statement and has been mentioned by other noble Lords. As the Statement says, raising productivity is the, "central long-term economic challenge facing the UK" The Chancellor said that Britain was facing a productivity emergency. It takes a German worker four days to produce what we make in five, which means that too many British workers work longer hours for lower pay than their counterparts. He is making it a key area of focus for the forthcoming industrial strategy. He tells us that if the UK raised its productivity by 1% every year it would add £240 billion to the size of the economy—£9,000 for every household in Britain The Government’s approach to raising productivity is based on encouraging long-term investment in economic capital such as technology, innovation, infrastructure and skills. It is also based on encouraging a dynamic economy which ensures that resources are put to their best use. According to the Statement, there has been a sustained worldwide slowdown in productivity since the financial crisis, which has exacerbated a long-standing gap between the UK and the most productive nations. Hence the Autumn Statement announces the setting up of a national productivity investment fund, which will be targeted at four areas which the Government believe are critical for improving productivity—housing, transport, digital communications, and research and development. It is to this body that the £23 billion I referred to earlier is being given to spend. Let us hope the money is spent wisely. The Chancellor had a difficult task in the Autumn Statement. In the circumstances he had little room for manoeuvre. However, he has made a promising start.