More than just the leaves aflutter

In the course of the last week, the new Chancellor Philip Hammond presented his Autumn Statement to parliament. As a general rule, this interim report on the state of UK public finances is only of interest to those of us who have an interest in fiscal policy issues. But this year, there was a lot more interest as it provided us with the first view of how the Office for Budget Responsibility –the fiscal watchdog – assessed the cost of Brexit, and what sort of fiscal response the government was able to provide.

The main takeaways were that the economy will grow more slowly than projected in March, when the exercise was last conducted, and that both public deficits and debt will be higher in the medium-term. Moreover, the government has amended its fiscal rules such that it must no longer achieve a budget surplus in three years’ time, and it will be content with a falling debt-to-GDP ratio over this horizon. The Institute for Fiscal Studies always provides a sober analysis of UK fiscal issues (here) and for a short overview of their take, Director Paul Johnson’s introductory remarks nail most of the issues (here). The only area where I would disagree with the IFS is that the additional capital spending goes nowhere near far enough to tackle the infrastructure spending deficit which has been building for a number of years.

My own forecasts, which you can find in the Treasury’s compendium of economic forecasts (here) have long suggested that official medium-term projections for public finance consolidation have been overly optimistic. For one thing, I have generally come up with slightly slower revenue projections than the OBR but more importantly, I have never been convinced that the government would be able to hold to its eye-wateringly tight spending assumptions. Two years ago, George Osborne’s plans implied that the share of public spending in the economy would fall to its lowest since the 1930s – he quickly dropped that pledge as the 2015 election loomed.

Even though current plans do not appear anywhere near as aggressive, they still imply a considerable amount of fiscal austerity. Whilst spending on the National Health Service is ring-fenced (health is protected from the budgetary cuts which hit other departments) this shifts the burden of spending cuts onto other areas. Moreover, an ageing population is putting strains on the health budget which the current fiscal plans do not address.  So the quality of its service will deteriorate without additional resources.

One of the great ironies of fiscal policy over the past six years has been the extent to which it has hit hardest those at the lower end of the income scale, since policy has focused on cutting the welfare budget which has resulted in major curbs on welfare entitlement. Yet much of the evidence suggests that the poorest households were much more likely to have voted for Brexit than those higher up the income scale. Anger at the squeeze on incomes is derived more from government policy than from the impact of EU migrants pushing down earnings (in much the same way that high immigration was the result of policy failures to curb non-EU migrant numbers, which still account for more than 50% of the total). 

Predictably, of course, pro-Brexit MPs were quick to denigrate the fiscal outline presented this week, particularly since the OBR attributes roughly half the deterioration in public finance forecasts since March to the decision to leave the EU. Iain Duncan Smith, said it was "another utter doom and gloom scenario" by an organisation that “has been wrong in every single forecast they've made so far." The walking cliché that is Jacob Rees-Mogg argued it has made "lunatic" assumptions and added that "experts, soothsayers, astrologers are all in much the same category." Ironically, as the FT pointed out yesterday (here), one of the Chancellor’s measures to provide support to a particular stately home directly benefits the Rees-Mogg family as it is the ancestral home of Jacob’s mother-in-law. So perhaps we could restore a little order to the public finances by removing that “lunatic” gesture?

More generally, I am beginning to find the Brexit brigade rather more than tiresome. Their tactic is to denigrate those who dare question whether Brexit is such a good idea. There will be longer-term economic consequences – we should have little doubt about that. And since when in a democracy has debate about the merit of an idea stopped just because we held a vote on it? As former PM John Major noted recently, the referendum result was a close call and “the tyranny of the majority has never applied in a democracy and it should not apply in this particular democracy.” He should know: Major had to suffer continued sniping from those he called the “cabinet bastards” (his “only excuse is that it was true”)

In my view, a tight fiscal policy helped stir up resentment at the status quo which morphed into the Brexit vote. Boris Johnson’s policy may be to have cake and eat it too, but that is not how economics works in the real world. Get used to it!