Economists’ views on Philip Hammond’s debut

Paul Johnson, director of the Institute for Fiscal Studies

Having missed two of their three fiscal targets and abandoned the third, this government’s fiscal policy was starting to look a little rudderless.

The chancellor had to provide some sense of direction, not least given the uncertainties surrounding so much else going on in economic policy. But that very uncertainty made choosing fiscal rules tricky. Anything too inflexible, and the chances would be too great for comfort that the new ones would be broken, just like nearly all their predecessors.

Philip Hammond chose to try to avoid that problem by announcing two new overall fiscal targets and a new cap on welfare spending.

His predecessor George Osborne had wanted the national debt as a proportion of national income to be falling every year over this parliament. That target fell at the first hurdle, increasing last year. Mr Hammond has replaced it with the rather less ambitious aspiration to have debt falling as a proportion of national income by the end of the parliament.

On the deficit, he was also forced to be less ambitious. Borrowing is forecast at a bit less than 1 per cent of national income by the end of the parliament, some way off the surplus we had been aiming for.

In that context, Mr Hammond’s new target of keeping the deficit at no more than 2 per cent of GDP provides some headroom. His less well-specified target of getting to budget balance at some point during the next parliament promises more austerity but with a fair bit of flexibility.

It would not take too much, though, to put even these targets in danger. Public finance forecasts would have to deteriorate by more than £20bn in 2020-21 to bring us close to a deficit of 2 per cent of national income.

But in this context, £20bn is not a very big number. Put everything together and there was a £30bn downgrade to the public finances in 2019-20 compared with the forecasts made just nine months ago in March.

Given the levels of uncertainty, not least about our post-2019 relationship with the EU, even these looser, more flexible rules do not look entirely secure.

Bronwyn Curtis, from The Society of Business Economists

Credible and sensible are the words that come to mind. It is what a chancellor should deliver, but it will disappoint the Brexit voters who are not happy with their lot. They want to see something different, not more of the same, with some tweaks.

Dissatisfaction with the status quo drove both the Brexit and Trump votes, but the policy response has been quite different. While the US president-elect is planning a big fiscal boost from tax cuts and higher public spending, the OBR’s economic forecasts have made it impossible to do the same in the UK.

There will be less money, not more in people’s pockets as higher inflation hits real earnings and that means lower living standards. The OBR expects real earnings to turn negative in the second half of 2017, and barely grow during the next five years.

The Jams (‘just about managing’ families) will gain some benefit from the new policies but will it be enough to offset the drop in their real earnings? Tax revenues and government borrowing are very sensitive to how much the economy grows and despite the OBR downgrading growth to 1.4 per cent in 2017 and 1.7 per cent in 2018, these figures are still higher than external forecasts, especially for next year.

Even with growth returning to an average of 2.1 per cent between 2019 and 2021, the OBR calculates that there is still a 35 per cent chance of the new targets not being met.

It is also hard for the Chancellor to escape the structural problems that beset the UK economy. The £23bn of infrastructure funds and the measures to encourage innovation are steps in the right direction, but he could have been bolder.

Given the uncertainties, the added flexibility he has given himself on the timing of bringing down the budget deficit is sensible, but the forecasts in this autumn statement suggest that being a “safe pair of hands” may not be enough.

Gerard Lyons, chief economist at Netwealth Investments, economic adviser to Policy Exchange and to Parker Fitzgerald

Finally, after the short-term misguided thinking of recent years, a longer-term economic strategy has started to emerge. This is good news. It includes an industrial policy, a clean Brexit, a commitment to free trade and an Autumn Statement that addresses key areas.

The positive aspect is the focus on the supply side. It is about an enabling environment, positioning the UK for the fourth industrial revolution. At some stage it might even trigger the economics profession to realise that Brexit is good for people and future growth.

The main positive in the statement was the new National Productivity Investment Fund, investing in transport, digital, research and development and housing.

The focus on regional policy and productivity-enhancing measures is good, although only when delivered will they be believed. Also welcome was the commitment to help people on low to middle incomes.

The UK’s economic problems include low investment and the twin budget and current account deficits. These are long lasting. Previous policy has not addressed them. But the solutions are Brexit-linked, with a global focus and long-term thinking.

The Treasury’s pre-referendum forecasts were wrong, driven by groupthink and a status quo bias. In contrast, the Autumn Statement forecasts from the independent Office for Budget Responsibility are credible.

They suggest a temporary slowdown because of uncertainty and the inflation impact of a weaker pound. I think they are too low, but even so they still show employment continuing to rise in coming years

There is a danger of pro-cyclical thinking. Low growth boosts the budget deficit and ties the chancellor’s hands. Either the economic forecasts are too low or the fiscal stimulus is not enough.

Also, at this stage of the cycle, after seven years of growth, the economy often slows. This is made more likely if a lack of confidence holds back private investment and public infrastructure. Although this was a good statement by an authoritative chancellor he could have been more upbeat.