Investment Clock insights

Economic Times December 2015


Ian Kernohan

30 November 2015

The Autumn Statement is perhaps more interesting from a political than an economic point of view.  On the economics, the big picture is scarcely changed from the July Budget: the Office for Budget Responsibility (OBR) made minor alterations to their GDP growth forecasts, while still pencilling in a £10bn surplus in 2019/20.  The UK economy still faces a lengthy period of fiscal austerity, much greater than any of its major competitors.  
Looking into the detail however, a more interesting picture emerges.  Lower assumptions on debt interest and inflation, extra taxes on corporates and second home buyers, not to mention a significant change in the OBR’s tax revenue modelling, provide the leeway to abandon the plan to cut tax credits.  This eases the pain of austerity on lower income groups, often referred to as the “strivers”, which should give a boost to consumption in 2016, given their relatively high propensity to consume rather than save.  
By smoothing the path of austerity, and placing a greater burden on companies and higher income groups, the Chancellor’s current plans now resemble Labour’s original pre-election deficit reduction plan. The Conservatives have succeeded in making Labour look profligate, only to steal their clothes.  Of course, a major issue with the opposition’s plans was whether a Labour government, perhaps reliant on SNP support, would have been able to implement any meaningful deficit reduction.    
Since the election of Jeremy Corbyn as leader of the Labour Party, the Conservatives appear keen to occupy the centre ground, as Labour moves leftwards.  So the politics behind the Autumn Statement are very clear: shore up electoral support for the Conservatives in lower income group, in the knowledge that their core vote has few electoral alternatives.  This is reminiscent of the Big Tent politics of the Blair era.
There are few implications for our UK economic view next year: we expect growth to remain close to trend, with the Bank of England raising interest rates in the second half of the year, as inflation moves out of letter writing territory.  The major risks to this view are much weaker than expected global growth and/or a significant economic impact from “Brexit” uncertainty.

The Autumn Statement is perhaps more interesting from a political than an economic point of view.  On the economics, the big picture is scarcely changed from the July Budget: the Office for Budget Responsibility (OBR) made minor alterations to their GDP growth forecasts, while still pencilling in a £10bn surplus in 2019/20.  The UK economy still faces a lengthy period of fiscal austerity, much greater than any of its major competitors.  

Looking into the detail however, a more interesting picture emerges.  Lower assumptions on debt interest and inflation, extra taxes on corporates and second home buyers, not to mention a significant change in the OBR’s tax revenue modelling, provide the leeway to abandon the plan to cut tax credits.  This eases the pain of austerity on lower income groups, often referred to as the “strivers”, which should give a boost to consumption in 2016, given their relatively high propensity to consume rather than save.  

By smoothing the path of austerity, and placing a greater burden on companies and higher income groups, the Chancellor’s current plans now resemble Labour’s original pre-election deficit reduction plan. The Conservatives have succeeded in making Labour look profligate, only to steal their clothes.  Of course, a major issue with the opposition’s plans was whether a Labour government, perhaps reliant on SNP support, would have been able to implement any meaningful deficit reduction.    

Since the election of Jeremy Corbyn as leader of the Labour Party, the Conservatives appear keen to occupy the centre ground, as Labour moves leftwards.  So the politics behind the Autumn Statement are very clear: shore up electoral support for the Conservatives in lower income group, in the knowledge that their core vote has few electoral alternatives.  This is reminiscent of the Big Tent politics of the Blair era.

There are few implications for our UK economic view next year: we expect growth to remain close to trend, with the Bank of England raising interest rates in the second half of the year, as inflation moves out of letter writing territory.  The major risks to this view are much weaker than expected global growth and/or a significant economic impact from “Brexit” uncertainty.

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