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Posts Tagged ‘Autumn Statement’

A more active fiscal policy? Changing the rule book

In his 2016 Autumn Statement, the new Chancellor of the Exchequer, Philip Hammond, announced that he was abandoning his predecessor’s target of achieving a budget surplus in 2019/20 and beyond. This was partly in recognition that tax revenues were likely to be down as economic growth forecasts were downgraded by the Office for Budget Responsibility. But it was partly to give himself more room to boost the economy in response to lower economic growth. In other words, he was moving from a strictly rules-based fiscal policy to one that is more interventionist.

Although he still has the broad target of reducing government borrowing over the longer term, this new flexibility allowed him to announce increased government spending on infrastructure.

The new approach is outlined in the updated version of the Charter for Budget
Responsibility
, published alongside the Autumn Statement. The government’s fiscal mandate would now include the following:

 •  a target to reduce cyclically-adjusted public-sector net borrowing to below 2% of GDP by 2020/21;
 •  a target for public-sector net debt as a percentage of GDP to be falling in 2020/21.

It also states that:

In the event of a significant negative shock to the UK economy, the Treasury will review the appropriateness of the fiscal mandate and supplementary targets as a means of returning the public finances to balance as early as possible in the next Parliament.

In the Autumn Statement, the new approach to fiscal policy is summarised as follows:

This new fiscal framework ensures the public finances continue on the path to sustainability, while providing the flexibility needed to support the economy in the near term.

With his new found freedom, the Chancellor was able to announce spending increases, despite deteriorating public finances, of £36bn by 2021/22 (see Table 1 in the Autumn Statement).

Most of the additional expenditure will be on infrastructure. To facilitate this, the government will set up a new National Productivity Investment Fund (NPIF) to channel government spending to various infrastructure projects in the fields of housing, transport, telecoms and research and development. The NPIF will provide £23bn to such projects between 2017/18 and 2021/22.

But much of the additional flexibility in the new Fiscal Mandate will be to allow automatic fiscal stabilisers to operate. The OBR forecasts an increase in borrowing of £122bn over the 2017/18 to 2021/22 period compared with its forecasts made in March this year. Apart from the additional £23bn spending on infrastructure, most of the rest will be as a result of lower tax receipts from lower economic growth. This, in turn, is forecast to be the result of lower investment caused by Brexit uncertainties and lower real consumer spending because of the fall in the pound and the consequent rise in prices.

But rather than having to tighten fiscal policy to meet the previous borrowing target, the new Fiscal Mandate will permit this rise in borrowing. The lower tax payments will help to reduce the dampening effect on the economy.

So are we entering a new era of fiscal policy? Is the government now using discretionary fiscal policy to boost aggregate demand, while also attempting to increase productivity? Or is the relaxation of the Fiscal Mandate just a redrawing of the rules to give a bit more flexibility over the level of stimulus the government can give the economy?

Videos
Autumn Statement 2016: Philip Hammond’s speech (in full) GOV.UK (23/11/16)
Philip Hammond’s autumn statement – video highlights The Guardian (23/11/16)
Key points from the chancellor’s first Autumn Statement BBC News, Andrew Neil (23/11/16)
Autumn Statement: higher borrowing, lower growth Channel 4 News, Helia Ebrahimi (23/11/16)
Autumn Statement: Chancellor’s growth and borrowing figures BBC News (23/11/16)
Markets react to Autumn Statement Financial Times on YouTube, Roger Blitz (23/11/16)
Hammond’s Autumn Statement unpicked Financial Times on YouTube, Gemma Tetlow (23/11/16)
Autumn Statement 2016: The charts that show the cost of Brexit Sjy News, Ed Conway (24/11/16)
BBC economics editor Kamal Ahmed on the Autumn Statement. BBC News (23/11/16)
Autumn statement: debate Channel 4 News, Financial Secretary to the Treasury, Jane Ellison, and Labour’s Shadow Business Secretary, Clive Lewis (23/11/16)
Autumn Statement: Workers’ pay growth prospects dreadful, says IFS BBC News, Kevin Peachey and Paul Johnson (24/11/16)

Articles
Autumn Statement 2016: Expert comment on fiscal policy Grant Thornton, Adam Jackson (23/11/16)
Philip Hammond loosens George Osborne’s fiscal rules to give himself more elbow room as Brexit unfolds CityA.M., Jasper Jolly (23/11/16)
Britain’s New Fiscal Mandate Opens Way To Invest For Economic Growth Forbes, Linda Yueh (23/11/16)
Autumn Statement 2016: experts respond The Conversation (23/11/16)
Chancellor’s ‘Reset’ Leaves UK Economy Exposed And Vulnerable Huffington Post, Alfie Stirling (23/11/16)
Britain’s Autumn Statement hints at how painful Brexit is going to be The Economist (26/11/16)
Chancellor’s looser finance targets highlight weaker UK economy The Guardian, Phillip Inman (24/11/16)
Hammond’s less-than-meets-the-eye plan that hints at the future Financial Times, Martin Sandbu (23/11/16)
Economists’ views on Philip Hammond’s debut Financial Times, Paul Johnson, Bronwyn Curtis and Gerard Lyons (24/11/16)

Government Publications
Autumn Statement 2016 HM Treasury (23/11/16)
Charter for Budget Responsibility: autumn 2016 update HM Treasury

Reports, forecasts and analysis
Economic and fiscal outlook – November 2016 Office for Budget Responsibility (23/11/16)
Autumn Statement 2016 analysis Institute for Fiscal Studies (November 2016)

Questions

  1. Distinguish between discretionary fiscal policy and rules-based fiscal policy.
  2. Why have forecasts of the public finances worsened since last March?
  3. What is meant by automatic fiscal stabilisers? How do they work when the economic growth slows?
  4. What determines the size of the multiplier from public-sector infrastructure projects?
  5. What dangers are there in relaxing the borrowing rules in the Fiscal Mandate?
  6. Examine the arguments for relaxing the borrowing rules more than they have been?
  7. If the economy slows more than has been forecast and public-sector borrowing rises faster, does the Chancellor have any more discretion in giving a further fiscal boost to the economy?
  8. Does the adjustment of borrowing targets as the economic situation changes make such a policy a discretionary one rather than a rules-based one?
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The UK’s public finances

As the Chancellor of the Exchequer, Philip Hammond, delivers his first Autumn statement, both the Office for Budget Responsibility (OBR) and the National Institute for Economic and Social Research (NIESR) have published updated forecasts for government borrowing and government debt.

They show a rise in government borrowing compared with previous forecasts. The main reason for this is a likely slowdown in the rate of economic growth and hence in tax revenues, especially in 2017. Last March, the OBR forecast GDP growth of 2.2% for 2017; it has now revised this down to 1.4%.

This forecast slowdown is because of a likely decline in the growth of aggregate demand caused by a decline in investment as businesses become more cautious given the uncertainty about the UK’s relationships with the rest of the world post Brexit. There is also likely to be a slowdown in real consumer expenditure as inflation rises following the fall in the pound of around 15%.

But what might be more surprising is that the public finances are not forecast to deteriorate even further. The OBR forecasts that the deficit will increase by a total of £122bn to £216bn over the period from 2016/17 to 2020/21. The NIESR predicts that it will rise by only £50bn to £187bn – but this is before the additional infrastructure spending and other measures announced in the Autumn Statement.

One reason is looser monetary policy. Following the Brexit vote, the Bank of England cut Bank Rate from 0.5% to 0.25% and introduced further quantitative easing. This makes it cheaper to finance government borrowing. What is more, the additional holdings of bonds by the Bank mean that the Bank returns to the government much of the interest (coupon payments) that would otherwise have been paid to the private sector.

Then, depending on the nature of the UK’s post-Brexit relationships with the EU, there could be savings in contributions to the EU budget – but just how much, no-one knows at this stage.

Finally, it depends on just what effects the measures announced in the Autumn Statement will have on tax revenues and government spending. We will examine this in a separate blog.

But even though public-sector borrowing is likely to fall more slowly than before the Brexit vote, the trajectory is still downward. Indeed, the previous Chancellor, George Osborne, had set a target of achieving a public-sector surplus by 2019/20.

But, would eventually bringing the public finances into surplus be desirable? Apart from the dampening effect on aggregate demand, such a policy could lead to underinvestment in infrastructure and other public-sector capital. There is thus a strong argument for continuing to run a deficit on the public-sector capital account to fund public-sector investment – such investment will increase incomes and social wellbeing in the future. It makes sense for the government to borrow for investment, just as it makes sense for the private sector to do so.

Articles
Autumn Statement: Why the damage to the public finances from Brexit might not be as bad as some think Independent, Simon Kirby (22/11/16)
Three Facts about Debt and Deficits NIESR blogs, R Farmer (21/11/16)
Autumn Statement: Big increase in borrowing predicted BBC News, Anthony Reuben (23/11/16)

Data
Economic and fiscal outlook – November 2016 Office for Budget Responsibility (23/11/16)

Questions

  1. Why have the public finances deteriorated?
  2. How much have they deteriorated?
  3. What is likely to happen to economic growth over the next couple of years? Explain why.
  4. How has the cut in Bank Rate and additional quantitative easing introduced after the Brexit vote affected government borrowing?
  5. What is likely to happen to (a) public-sector borrowing; (b) public-sector debt as a proportion of GDP over the next few years?
  6. Why is a running a Budget surplus neither a necessary nor a sufficient condition for reducing the government debt to GDP ratio.
  7. What are the arguments for (a) having a positive public-sector debt; (b) increasing public-sector debt as a result of increased spending on infrastructure and other forms of public-sector capital?
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The Autumn Statement about a long cold winter

The Autumn Statement, delivered annually by the Chancellor of the Exchequer in late November or early December, is rather like a second Budget. In his statement, the Chancellor presents new forecasts for the UK economy by the Office for Budget Responsibility (OBR) and announces various policy changes in the light of the forecasts.

So what does this OBR say? Its headline reads, “Government borrowing revised higher as weaker economy hits revenues” and this is followed by the statement:

The OBR has revised up its forecasts for public-sector borrowing over the next five years, as a weaker outlook for the economy reduces tax revenues. As a result, the Government no longer seems likely to achieve its target of reducing public-sector net debt in 2015–16.

The chart shows OBR forecasts for public-sector net borrowing made in June 2010 (its first forecast after the OBR was formed by the Coalition government), in March 2012 and in December 2012. The current forecast clearly shows borrowing set to decline more slowly than in the earlier forecasts. Click here for a PowerPoint of the chart. (Note that the effects of transferring the pension assets of the Royal Mail to the Treasury and the effects of not paying interest to the Bank of England on government bonds purchased under quantitative easing programmes have not been included in order to make the three forecasts consistent.)

So with a weaker economy and slower recovery than previously forecast, what are George Osborne’s options? He and his colleagues, along with various economists, argue for sticking to Plan A. This means continuing with austerity measures in order to get the public-sector deficit down. But with government borrowing having fallen more slowly than forecast, this means further government expenditure cuts, such as reductions in benefits, cuts in grants to local authorities and reductions in pensions relief. Even so, achieving his two targets – (1) eliminating the cyclically adjusted current (as opposed to capital) budget deficit by 2015/16 (the so-called ‘fiscal mandate’), and (2) public-sector debt falling as a proportion of GDP by 2015/16 – will both be missed. They were extended by a year in the Budget last March. They have now been extended by a further year to 2017/18.

The opposition and many other economists argue that Plan A has failed. Austerity has prevented the economy from growing and has thus meant a slower reduction in the deficit as tax revenues have not grown nearly as much as hoped for. A more expansionary policy would allow the deficit to be reduced more quickly, especially if extra government expenditure were focused on infrastructure and other capital spending.

It could be argued that George Osborne’s Autumn Statement moves some way in this direction – a Plan A+. He is making deeper cuts in welfare and government departmental spending in order to divert monies into capital spending. For example, there will be £1bn of extra expenditure on roads; £1bn extra on schools; £270m on FE colleges; and £600m extra for scientific research. Also, by extending the period of austerity to 2017/18, this has meant that he has not had to make even deeper cuts. What is more, he is increasing income tax allowances and cutting the rate of corporation tax by 1% more than originally planned and scrapping the planned 3p per litre rise in road fuel duty. He hopes to make up any lost tax revenue from these measures by HMRC clamping down on tax evasion.

But by sticking to his broad austerity strategy, and with many parts of the global economy having weakened, it looks as if the UK economy is in for several more years of sluggish growth. Winter is going to be long.

Webcasts and Podcasts
Autumn Statement: George Osborne scraps 3p fuel duty rise BBC News, Carole Walker (5/12/12)
Autumn Statement: OBR says deficit ‘shrinking more slowly’ BBC News, Robert Chote (5/12/12)
Autumn Statement: Headlines from George Osborne’s speech BBC News, Andrew Neil (5/12/12)
Autumn Statement: Flanders, Robinson and Peston reactio BBC News, Stephanie Flanders, Nick Robinson and Robert Peston (5/12/12)
Boosting the British Budget CNN, Jim Boulden (5/12/12)
Autumn statement 2012: key points – video analysis The Guardian, Larry Elliott, Jill Treanor, Patrick Collinson and Damian Carrington (5/12/12)

Articles
Autumn Statement 2012: the full speech The Telegraph (5/12/12)
Autumn Statement: Benefit squeeze as economy slows BBC News (5/12/12)
Autumn Statement: At-a-glance summary of key points BBC News (5/12/12/)
Austerity to last until 2018, admits George Osborne Independent, Oliver Wright
Autumn statement: George Osborne reveals benefits cut Channel 4 News (5/12/12/)
Autumn Statement 2012: Cut welfare, create jobs – a very Tory statement The Telegraph, Damian Reece (5/12/12)
Autumn statement 2012: economy weaker than expected, Osborne says The Guardian, Heather Stewart (5/12/12)
Analysis: Even the ‘autumn’ bit seemed optimistic BBC News, Chris Mason (5/12/12)
George Osborne’s autumn statement 2012: reaction The Guardian, Julia Kollewe (5/12/12)
Candid Osborne avoids political risk Financial Times, Janan Ganesh (5/12/12)
Autumn statement: Why George Osborne’s Budget won’t be a game changer The Telegraph, Allister Heath (4/12/12/)
Autumn statement 2012: expert verdict The Guardian, Richard Murphy, Dominic Raab, Ann Pettifor, Gavin Kelly, Prateek Buch and Mark Serwotka (5/12/12/)
The alternative autumn statement Channel 4 News (5/12/12)
Autumn Statement 2012: man cannot live by deficit reduction alone The Telegraph, Roger Bootle (5/12/12)
Autumn statement: cuts are just a sideshow The Guardian, John Redwood (5/12/12)
What does the Autumn Statement mean for business? Economia, David Mellor (5/12/12)
Autumn Statement Reaction: UK AAA ‘safe for today’ Investment Week (5/12/12)
Autumn Statement: A wintry statement of reality BBC News, Stephanie Flanders (4/12/12)
What has changed? BBC News, Stephanie Flanders (6/12/12)
UK warned on debt ‘credibility’ over AAA rating BBC News (5/12/12)

Data
Autumn statement 2012 in charts The Guardian, Simon Rogers (5/12/12/)
Who suffers most from Britain’s austerity? How the figures stack up The Guardian, Tom Clark (5/12/12)
Economic and fiscal outlook charts and tables – December 2012 OBR (5/12/12)
Economic and fiscal outlook supplementary economy tables – December 2012 OBR (5/12/12)
Forecasts for the UK economy HM-Treasury

OBR, Treasury and IFS links
Economic and fiscal outlook – December 2012 OBR (5/12/12)
Autumn Statement 2012 HM Treasury (5/12/12)
Autumn Statement 2012 IFS

Questions

  1. Distinguish between ‘stocks’ and ‘flows’. Define (a) public-sector net borrowing (PSNB) and (b) the public-sector net debt (PSND) and explain whether each one is a stock or a flow.
  2. Summarise the measures announced by George Osborne in his Autumn Statement.
  3. What are his arguments for not adopting a more expansionary fiscal policy?
  4. Assess his arguments.
  5. What is meant by the ‘output gap’? What are the OBR’s forecasts about the output gap and what are the implications?
  6. How has quantitative easing affected PSNB and PSND?
  7. Distinguish between the cyclical and structural deficit. What implications does this distinction have for fiscal policy?
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A lost decade (or more)

Twice a year, directly after the government’s Spring Budget and Autumn Statement, the Institute for Fiscal Studies gives its verdict on the performance of the economy and the government’s economic policies – past and planned. This year is no exception. After the Chancellor had delivered his Autumn Statement, the next day the IFS published its analysis. And what grim reading it makes.

• Real average (mean) incomes in 2011 will have fallen by 3%.
• Between 2009/10 and 2012/13, real median household incomes will have fallen by 7.4%
• Over the same period, real mean household income will have fallen by 4.7% – easily the biggest 3-year drop since records began in the mid 1950s.
• Real mean household incomes will be no higher in 2015/16 than in 2002/03.
• The poorest will be hardest hit by the measures announced in the Autumn Statement.
• Infrastructure spending of £4bn to £5bn will only go some way offsetting the effects of £17bn capital spending cuts over the Parliament.
• The economy will be 3.5% smaller in 2016 than thought in March.
• The structural budget deficit is 1.6% higher than thought in March.
• That will extend to 6 years the period over which total spending will have been cut year on year.

Referring to this last point, Paul Johnson, director of the IFS, said in his Opening Remarks, “One begins to run out of superlatives for describing quite how unprecedented that is. Certainly there has been no period like it in the UK in the last 60 years.” Referring to the fall in real incomes, he said, “Again we are running out of superlatives to describe just how extraordinary are some of these changes.”

Commentators have referred to the “lost decade” where the average Briton will not have seen an increase in real income.

Articles
Autumn Statement 2011: Families face ‘lost decade’ as spending power suffers biggest fall since 1950s, says IFS The Telegraph, Matthew Holehouse (30/11/11)
Autumn Statement 2011: IFS talks down George Osborne’s growth plan The Telegraph, Philip Aldrick (30/11/11)
Autumn statement study by IFS predicts lost decade for UK living standards Guardian, Katie Allen and Larry Elliott (30/11/11)
Britons Enduring 13-Year Squeeze on Living Standards, IFS Says Bloomberg Businessweek, Gonzalo Vina (30/11/11)
The UK now faces a ‘lost decade’ Financial Times, Martin Wolf (29/11/11)
Warning of seven-year squeeze Independent, James Tapsfield, Andrew Woodcock (30/11/11)
Osborne’s impact laid bare: The rich get richer and the poor get poorer Independent, Ben Chu, Oliver Wright (1/12/11)
Incomes to fall 7.4% in three years, says IFS BBC News (30/11/11)
No growth in income for 14 years, warns IFS BBC News, IFS director Paul Johnson (30/11/11)
UK economy: Third worst year since the war BBC Today Programme, IFS director Paul Johnson (29/11/11)

IFS Analysis
Autumn Statement 2011 and the OBR Economic and Fiscal Outlook IFS (30/11/11)

Questions

  1. Why is it likely that the median real income will have fallen by more than the mean real income?
  2. Why is the structural deficit now estimated to be some 1.6 percentage points higher than was estimated by the OBR back in March 2011?
  3. How could the structural deficit be affected by a prolonged recession? Is this a case of hysteresis?
  4. What are the government’s fiscal rules?
  5. Is the IFS predicting that the rules will be met? What might adversely affect this prediction?
  6. If technological progress is allowing a continuous increase in potential real GDP, why will median real incomes have fallen over the 13 years between 2002/03 and 2015/16? What might have affected long-term aggregate supply adversely?
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Statement of the obvious?

On Tuesday 29 November, the Chancellor of the Exchequer delivered his Autumn Statement. This presented the outlook for the UK economy, with forecasts supplied by the independent Office for Budget Responsibility (OBR). It also contained details of government fiscal measures to tackle various macroeconomic problems, including economic slowdown and high levels of national debt.

The outlook for the UK economy came as no surprise. Things are looking much bleaker than a few months ago. The OBR, along with other forecasters, has downgraded its predictions of the UK’s growth rate. Although it is still forecasting positive growth of 0.9% this year and 0.7% in 2012, these rates are well below those it predicted just eight months ago. In March it forecast growth rates of 1.7% for 2011 and 2.5% for 2012.

To make things worse, its growth forecasts are based on the assumptions that the eurozone crisis will be resolved with little or no effect on the UK. But even if that were so, the debt reduction plans in the eurozone are likely to drive the eurozone back into recession. This, in turn, will impact on UK exports, more than 50% of which go to eurozone countries.

The OBR forecasts that national debt will be 67% of GDP this year and will rise to 78% by 2014/15 but then start to fall. Government borrowing is forecast to be £127bn this year, falling to £120bn in 2012/13 and then more substantially each year after that to £24bn in 2016/17.

So what measures were included in the Autumn Statement? These are detailed in the articles below, but the key ones were:

• a programme of credit easing, which will underwrite up to £40bn in low-interest loans for small and medium-sized businesses.
• £5bn of public money to be invested in infrastrucuture projects and a further £5bn in the next spending round. Agreement had been reached with two groups of pension funds to invest a further £20bn of private money in infrastructure projects.
• an additional £1.2bn for capital investment in schools.
• A cap on public-sector pay increases of 1% per year for the two years after the current two-year pay freeze.

The following videos and articles give details of the forecasts and the measures and give reactions from across the political spectrum.

Webcasts
George Osborne: Key points from chancellor’s speech BBC News, Andrew Neil 29/11/11)
Autumn Statement 2011: George Osborne – my plan to ‘see Britain through The Telegraph on YouTube (29/11/11)
UK economy slows to crawl Reuters (29/11/11)
George Osborne’s autumn statement – video analysis Guardian, Larry Elliott (29/11/11)
Autumn Statement: Osborne reveals state of UK economy BBC News, Nick Robinson (29/11/11)
Autumn Statement: Why is the deficit not shrinking? BBC News, Hugh Pym (29/11/11)
Autumn Statement: Robinson, Flanders and Peston analysis BBC News, Nick Robinson, Stephanie Flanders and Robert Peston (29/11/11)
Can the UK economy be ‘re-balanced’? BBC Newsnight, Paul Mason (29/11/11)

Articles
Autumn Statement 2011: main points The Telegraph, Rachel Cooper (29/11/11)
The Autumn Statement at a glance WalesOnline, Rhodri Evans (30/11/11)
Autumn Statement Summary 2011 TaxAssist Accountants (29/11/11)
Into the storm The Economist (3/13/11)
A battalion of troubles The Economist (3/12/11)
Weapons of mass construction The Economist (3/12/11)
Mr Osborne’s unwelcome statement BBC News, Stephanie Flanders (29/11/11)
£30bn of extra cuts keep Osborne on track, just BBC News, Paul Mason (29/11/11)
Autumn Statement 2011: Commentators give their verdict The Telegraph (30/11/11)
Autumn Statement 2011: concern remains but ‘Plan A-plus’ welcomed The Telegraph, Graham Ruddick (29/11/11)
Autumn statement: George Osborne’s cutting fantasy is over Guardian, Robert Skidelsky (29/11/11)
Hoarding for the apocalypse? I really wouldn’t blame you Guardian, Zoe Williams (30/11/11)

Reports and data
Autumn Statement 2011 – documents HM Treasury (29/11/11)
Economic and fiscal outlook – November 2011 Office for Budget Responsibility (29/11/11)
Autumn statement 2011: the key data you need to understand George Osborne’s speech Guardian DataBlog (29/11/11)
How much will the autumn statement cost and how will the economy change? Guardian DataBlog (29/11/11)

Questions

  1. Compare the OBR’s March and November 2011 forecasts.
  2. What factors explain the differences in the two sets of forecasts?
  3. For what reasons might national debt in the future turn out to be higher or lower than that forecast by the OBR?
  4. What will be the impact on aggregate demand of the measures announced in the Autumn Statement?
  5. What will be the impact on aggregate supply of the measures announced in the Autumn Statement?
  6. Why may a recession impact not just on aggregate demand but also on long-term aggregate supply?
  7. Why may increased pessimism by both consumers and producers make it more difficult for the government to meet its macroeconomic objectives?
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