Autumn Statement: future’s bleak as Brexit costs £59bn
Yesterday, Philip Hammond unveiled his first Autumn Statement as chancellor and also the first budget statement since the referendum. And it’s fair to say that the future isn’t looking all that rosy.
Increased borrowing to at least £122bn
The big headline from the Autumn Statement is that there will be increased borrowing to at least £122bn over the next five years. And the Office for Budget Responsibility calculate that a whopping £59bn of that is a direct result of Brexit. Those figures are pretty eye watering on their own. But remember that when the budget was set in the spring by George Osborne, he had aimed for the government to actually be in surplus within the same period. So in less than 9 months, the forecast has changed to the public finances being £122bn worse off.
And it gets worse…
Slower economic growth
The OBR’s economic forecasts also show slower economic growth for the country. It will go down from a forecast of 2.1% for 2016 to 1.7% in 2017.
The OBR warned that uncertainty around Brexit could make these figures worse. You can imagine how difficult a job they will have in making forecasts when we still do not yet know what the government’s plan is as to what Brexit will look like (other than ‘Brexit means Brexit’ of course).
Lower trade flows, lower investment and lower migration lead to lower output
They OBR make the judgement that “any likely Brexit outcome would lead to lower trade flows, lower investment and lower net inward migration”. This would also likely lead to “lower potential output”. This is a tricky consequence for the chancellor to come to terms with as he believes that increased productivity is key to a better economy. This is a particularly interesting view of immigration’s impact on the economy.
The OBR also added that their forecast didn’t include consideration of other potential Brexit outcomes such as job losses and that consumers increase precautionary saving.
In the near term, as the negotiations get under way, we assume that GDP growth will continue to slow into next year as uncertainty leads firms to delay investment and as consumers are squeezed by higher import prices, thanks to the fall in the pound. But we do not assume that firms shed jobs more aggressively or that consumers increase precautionary saving, both of which are downside risks if the path to Brexit is bumpy.
Office for Budget Responsibility
There were some pluses in the Autumn Statement. But tiny in comparison to the whoppers above. Given the financial situation, that’s no surprise!
The main plus comes in the form of investment in infrastructure including £23bn in innovation and infrastructure over five years. There was also more in investment to transport networks and roads. Is it enough to counter all the negatives? Probably not but Brexit has put us between a rock and a hard place. Spend more and have an even bigger deficit. Spend less and risk slowing the economy even further.
Reaction to the Autumn Statement
As you might expect, reaction to the statement has been mixed. There are those who believe that the Statement and OBR’s forecasts are too gloomy (I suspect, they’ll be the ones who didn’t like to hear too much from experts in the run up to the referendum).
The OBR are probably still quite wrong about 2017 – their forecast probably is too low, their borrowing forecast is far too high, and we’ll get good access to the single market once we’re out of the EU.”
John Redwood MP
And there are those who believe this only further supports the argument against a ‘hard Brexit’…
We’ve seen the gap between what we could’ve had and what we will have is a quarter of a trillion pounds over this Parliament. Can you imagine the number of nurses, doctors, social workers, teachers, police officers and soldiers we could be paying for if this government hadn’t headed for a hard Brexit that nobody voted for?”
Tim Farron, Leader of the Liberal Democrats
Interestingly, although the two quoted above have different outlooks, they both support good access to the single market.
More on the OBR’s forecasts and the Autumn Statement
Analysing the UK’s public finances is undertaken by the Office for Budget Responsibility (OBR), which was set up in 2010. The chancellor’s budget and statement is based on the OBR’s economic forecasts and analysis. Their forecasts are based on the information they have including what they could glean from the government about their Brexit plan and strategy. This includes a request for information from the Treasury about potential costs in respect of the assurances provided to Nissan. The Treasury were not forthcoming.
BBC: Autumn Statement 2016 summary – Key points at-a-glance
The Guardian: Nissan in UK – Treasury refuses to tell OBR if cost attached to decision
Office for Budget Responsibility: Economic and fiscal outlook – November 2016
Image: Philip Hammond
© Inna Sokolovska / Shutterstock.com
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