AS 2015: Economic view

Lower than expected public borrowing forecasts allowed the chancellor to cancel planned cuts to tax credits next year, while boosting spending on transport infrastructure and housing. However, he has also pencilled in around £5 billion of extra net tax rises by 2020 to help to achieve his target of moving the budget back into surplus by the end of this Parliament.

The OBR’s view of UK economic prospects has changed little since July. As the table shows, they still expect economic growth to proceed at a steady pace averaging around 2.4% per annum, and still expect inflation to rise back gradually towards its 2% target over the next few years.

Comparison of key OBR forecasts in this Autumn Statement and July 2015 Budget

*Excluding borrowing of public sector banks and adjusted to include borrowing of housing associations

Source: OBR

The chancellor did, however, get an early Christmas present from the OBR when they reduced their projections for underlying public borrowing slightly in the medium term, despite signs from data last week that we may be heading for a borrowing overshoot this financial year.

This reflects greater optimism by the OBR about income tax, corporate tax, national insurance and VAT receipts, offset by lower than expected stamp duty receipts from high value transactions. In addition, interest rates on government debt are now expected to be lower than assumed in July, reflecting shifts in market opinion on how quickly the Bank of England will raise interest rates and unwind its past purchases of government bonds.

The OBR’s more favourable public borrowing projections gave the chancellor some extra wiggle room, most notably by cancelling planned tax credit cuts in 2016/17. He is also raising significant extra sums from the apprenticeship levy (around £3bn per annum by 2020) and increased stamp duty on second homes (around £0.9bn by 2020). In total, net tax rises of around £5bn were pencilled in by 2020, on top of net tax increases of around £7bn announced in July.

The chancellor was also able to announce increased spending on transport infrastructure and housebuilding, both of which are very welcome in supporting longer term economic growth and countering chronic shortages of housing supply. The government’s proposed planning reforms should also have a positive effect in this area. However, it will take a long time to make up for the relatively low rates of housebuilding in the UK over the past two decades, so we don’t think this will be enough to stem the rise in ‘generation rent’ over the next five years.

Despite the tax credit changes, there is still some pain to come. Welfare cuts totalling around £12bn by 2020 will still be made, but now with a more gradual phasing in of these cuts over time. Unprotected government departments will face a further Parliament on basic rations as regards their day to day spending, even if these cuts are not quite as severe as were expected back in July. Local authorities will be allowed to raise council tax to help to fund spending on social care, but will face a continued squeeze on their spending in other areas.

Overall, the chancellor has made good use of the more favourable OBR borrowing forecasts to boost capital spending in key areas and ease in his spending cuts more gradually over time, while still keeping to his previous target of a £10bn budget surplus in 2019/20. But to achieve this he did also announce further net tax rises of around £5bn, over and above what was announced in July.