Why the Chancellor is likely to save his post-Brexit stimulus
Economy Watch by Neil Gibson of the UU Economic Policy Centre
Up until the last decade economists only had one 'day in the sun' every year. On Budget day there would be a focus on cigarettes and alcohol taxes and a smattering of comment on minor tweaks elsewhere in the tax system.
This feels a very long time ago, with the Great Recession, Brexit and Trump, all surprising and challenging commentators and policymakers alike. Now economists are in demand all year round and tomorrow's Autumn Statement is now covered with almost the same zeal as the Budget. This year all the focus will be on whether the new Chancellor will he feel the need to apply some stimulus to ward off the potential Brexit impacts. The answer would appear to be, probably not.
Chancellor Hammond signalled very early in his new role that he would not stick to the previous Conservative pledge to balance the budget by 2019/20 and signalled a willingness to spend to deal with any economic slowdown that might arise under Brexit. This lead to many commentators to expect an end to the austerity era and the implementation of a stimulus agenda. For a number of reasons, it would appear this is becoming increasingly unlikely:
1) Good economic data: The initial headline economic data has been better than expected, GDP came in above expectations, the labour market continues to expand and retail sales rose 7.4% in the year to October 2016. Stock markets, and even investment decisions have surprised on the upside and where data has been, on the face of it weak, such as the fall in sterling, this has had a positive impact through the improvement in export competitiveness.
2) Disappointing public finances: Despite the strong labour market performance, tax receipts have come in below expectations and therefore the deficit is set to be higher this year than projected. This leaves the Chancellor with less wiggle room than he would have hoped to have. Pro-Europeans will point to this poor financial position as a fallout from the vote but in truth it was highly unlikely that the Government targets would have been met anyway - they have continually come up short in recent years.
3) Admitting the need could be damaging: Signalling a need to apply a boost to the economy is tantamount to saying there is a Brexit problem and admitting to the markets that the Government is worried. This is not the message the Conservative party wants to send now, internally or externally. They would rather point to how the UK economy is showing its strength and dynamism as it exits from Europe.
4) Keeping the powder dry: Given the early stage of the divorce proceedings it is almost certain there will be some bumps along the way and there may need to be ability to respond with some stimulus. Doing this now, before there are clear signs of economic weakness, would both reduce the impact of measures and damage the ability to fund them when the time comes.
So what might we expect? There will be some emphasis on investment for future productivity, which remains a huge concern at the highest level in Government. A devaluation of the currency is helpful for competitiveness but a much more desirable outcome would have been a rapid escalation in the stubbornly underwhelming productivity performance. This means a boost to capital investment is very possible. Already the government is signalling progress on air expansion, on HS2, and new power stations, though these are longer term projects and it is likely there will be some shorter term boost to the capital works programmes. This may be linked to more measures on the housing side with a focus on the pressures in London and the South East.
The one thing the UK cannot cope with is a retraction in consumer spending and a fall in house prices would be a sure way to ensure that happens, so the housing market remains a key focus for the Chancellor. Measures to further improve the UK's competitive position would be very challenging for the EU, so expect behind the scenes horse trading on 'passporting' and financial services rights for promises on fair tax competition.
*In next week's Economy Watch, we hear from Andrew Webb of Webb Advisory