The Same Party, But A Very Different Autumn Statement


Since 2010, we have become accustomed to very political Budgets and Autumn Statements from George Osborne. The former Chancellor tended to prefer policy tweaks which generally involved small changes, such as pensioner bonds and corporation tax cuts, which looked good on the front of the newspapers the next day. However, with Phillip Hammond now in the Treasury, this is likely to change.

This year’s Autumn Statement promises to break the mould as it is seen as the most important in recent years. Firstly, after the Brexit vote in June some level of fiscal stimulus is expected to support the economy through this period of uncertainty. In addition, it is important to see how relaxed Hammond will be over the deficit, which still stands at an uncomfortable 4% of GDP. Finally, this Statement will be likely to signal any key changes in policy compared to Osborne, for example over housing.

Many commentators had expected many quick announcements of fiscal stimulus upon Hammond’s arrival in the Treasury to alleviate the panic following the Brexit vote. However, Hammond projected a calm, methodical approach, by soothing markets with hints about a ‘fiscal reset’ and investment in infrastructure being announced at the Autumn Statement, without actually announcing any stimulus. This seems to have combined well with the aggressive monetary easing announced at the Monetary Policy Committee’s meeting in August, showing that the Governor and Chancellor recognise the threats posed by Brexit but are not panicking themselves.

However, there is very little room to further loosen monetary policy, due to interest rates already being at an all-time low of 0.25% and with the threat of inflation jumping to around 4% by the end of 2017. Mr Hammond is reported to have calculated that UK growth next year without some stimulus could be a meagre 0.8%. So, it remains to be seen if Hammond will try to head off the problem early by launching a bout of stimulus on November 23rd, or if he will wait to see how the economy fares going into 2017.

The recent noises made by the Chancellor about stimulus should not be confused with him being relaxed about the deficit. At a recent meeting with Tory MPs, he warned that the deficit remains ‘eye-wateringly large’ so there needed to be discipline on departmental spending to reassure the markets. Also, the size of the fiscal stimulus may be reduced due to poor government borrowing figures and the higher than expected third quarter growth of 0.5%.

Perhaps Hammond’s most important announcement as Chancellor so far was to quickly abandon Osborne’s target of achieving a budget surplus by 2019-20. This is significant because it could signal the end of the Conservatives as a balanced budget party. Osborne’s speech to the Tory conference in 2008 ended the previous eight years of the party matching the Labour government’s successive spending plans, and since this moment achieving a balanced budget has been the ‘Holy Grail’ of the Tories economic plans.

Therefore, one thing to look out for in the Autumn Statement is Hammond’s forecasts for the deficit, and whether he sets a target year for achieving a balanced budget. My view is that Hammond is still a ‘fiscal hawk’ like Osborne but is more pragmatic, seeing that now is not the time to reduce the deficit with the current uncertainty. However, I expect to see in the plans Hammond targeting a deficit of around 2% of GDP by the end of this Parliament.

One factor that was often missed during Osborne’s reign was a longer-term objective to reduce the size of the state through reducing public spending. During the last quarter of the twentieth century, government spending as a percentage of GDP levelled out at around 43%. Osborne’s policies set out to reverse this level, targeting a level of 37% of GDP in his last budget in March. This 6% change may not sound much but it is shifting the UK from the middle of the OECD on this measure to near the lowest, with public spending more like that of the U.S. Therefore, one figure that will be of particular interest is the forecast of government spending to GDP by the end of Parliament, as it will show whether Hammond is as committed to ‘roll back the state’ as Osborne was.

Another significant change in policy could be in relation to housing. Osborne’s main measures on this topic, ‘Help to Buy’ mortgages and the ‘Help to Buy ISA’, did little to address the desperate need for more homes to be built in the UK. Hammond has recently lamented that the bottleneck in planning ‘has not yet been effectively addressed’. Sajid Javid, the Communities Secretary, has already launched a £3 billion Home Building Fund. Also, a housing white paper is expected to come out around the same time as the Autumn Statement, and it will include proposals for a shake-up of the planning system designed to get more houses built. Hammond and Javid seem prepared to take a hit from the Tories more ‘NIMBY’-ish supporters to get this done.

Since taking over as Chancellor, Hammond has made all the right noises. However, on November 23rd he will have the tough job of convincing markets that fiscal policy will be able to stave off any serious slowdown in the economy, whilst maintaining a long-term commitment to deficit reduction. Negotiating the UK economy through the Brexit process is going to be a difficult job for anyone, so November 23rd will be our first chance to see if Hammond can rise to this challenge.