Philip Hammond’s first fiscal policy statement  since becoming Chancellor was, given the uncertainty surrounding the economic outlook in the wake of the Brexit vote, inevitably a more downbeat one than George Osborne was able to provide in March. The Office for Budget Responsibility’s (OBR) growth forecasts were revised down markedly, with growth in 2017 now expected to be 1.4%, 0.8ppt lower than forecast in March. 

GDP forecasts

Source: OBR, BoE, Thomson Reuters and Daiwa Capital Markets Europe Ltd.

And growth in 2018 is also expected to be lower than expected in March, by 0.4ppt although, as the chart above shows, the OBR expects growth to rebound much more rapidly than the BoE does. And with lower growth, comes lower tax receipts and higher government spending. Public sector net borrowing (PSNB) this year is now expected to be £13bn higher than expected in March, at £68bn. And deficits thereafter are expected to remain higher than previously forecast, by a cumulative £122bn over the coming five years.

Public sector net borrowing

Source: OBR and Daiwa Capital Markets Europe Ltd.

Indeed, these forecasts meant that the Chancellor had to tear up his predecessor’s fiscal rules, which were centred on balancing the budget by the end of the current Parliament (2019/20). Now, however, rather than a surplus of £10bn, a deficit of £22bn is expected. So, the Chancellor unveiled (yet another) set of fiscal rules, with the primary aim to deliver a fiscal surplus in the next Parliament and to have the government debt stock as a share of GDP falling by the end of the current Parliament.

Public sector net investment

Source: OBR and Daiwa Capital Markets Europe Ltd.

Of course, in the immediate aftermath of the Brexit vote there was much talk of a fiscal stimulus at this Autumn Statement to support growth. But, with growth having subsequently been better than expected and with the fiscal outlook much worse, the Chancellor offered little new. There was the announcement of a £23bn investment fund over the next five years. But at just £5bn a year, the impact on growth will be negligible and will only return net investment as a share of GDP to the level it was in 2010. Indeed, rather than provide support to growth over coming years, fiscal policy is projected to continue to tighten each year for the next six years, by an average of 0.5% of GDP each year, a significant tightening that will weigh on growth at a time when the economy is slowing anyway. 

UK: Fiscal tightening*

*Reduction in cyclically adjusted net borrowing as a share of GDP. Source: HM Treasury and Daiwa Capital Markets Europe Ltd. 

All fiscal and economic forecasts are, of course, subject to great uncertainty and are more likely to be wrong than right. And these forecasts are more uncertain than ever given the continued lack of clarity over what Brexit means. Indeed, in the absence of any information from the Government on what Brexit will entail, the OBR simply assumed that the UK leaves the EU in April 2019 and that a new trade deal is put in place that slows the pace of both import and export growth over the next 10 years. Net immigration, however, is assumed to remain significantly higher than the ‘tens of thousands’ that the Government says it is aiming for. Nevertheless, the OBR expects Brexit to blow a hole in the public finances. Of the cumulative £122bn additional borrowing by the Government it expects over the next five years, it puts £57bn of that specifically down to the impact of Brexit. And, of course, if Brexit turns out to be harder than expected, or the OBR has underestimated the impact of even the soft Brexit it has assumed, then growth will be weaker, and deficits therefore larger, than even included here. 

Sources of changes to PSNB forecasts

*Since the Budget announcement in March. Source: OBR and Daiwa Capital Markets Europe Ltd.

All told, today’s Autumn Statement can be seen as a holding operation by the Chancellor as he awaits more details on when and how Brexit will happen and the economic impact of that. By doing so he gives himself room to do more at the next major fiscal announcement (which will be in a year’s time as the Chancellor announced today that the Budget will move to the Autumn) if required. But that is a long way off, while the suspicion has to be that a Chancellor that seemed initially to favour providing fiscal support in the face of lower growth has now got cold feet in the face of a political imperative within his own party to bring the deficit down. As such, if growth does end up slowing more than expected, expect the BoE to, as usual, be left to provide what support to growth it can while fiscal consolidation remains the over-riding consideration of the Government.