Chancellor George Osborne will present his Autumn Statement for the United Kingdom on Wednesday 25 November. He will also present a Spending Review outlining the government's spending plans through to 2020.
It seems unlikely that there will be any major change in the United Kingdom's economic tack in Wednesday’s Autumn Statement and Spending Review. It was as recently as July that Chancellor George Osborne delivered a revised budget that was covered in a purely Conservative cloak after the party gained a majority in May’s general election. It would therefore be a major surprise if the chancellor made any major changes of tack in the Autumn Statement after adopting a purely Conservative agenda in the July budget following the jettisoning of the party's former Liberal Democrat partners.
However, the chancellor is facing a slightly less rosy and more uncertain situation on both the economic and public-finances fronts coming into the Autumn Statement and Spending Review than he likely expected in July.
On the economic front, GDP growth moderated to 0.5% quarter on quarter (q/q) in the third quarter from 0.7% q/q in the second quarter, while the global economic environment is currently challenging and uncertain. The struggles of the UK manufacturing sector through 2015 have been a particular worry for the chancellor. This puts pressure on the chancellor to come up with some measures to help the sector and UK exporters.
Having said that, UK GDP growth still looks to come in at 2.4% in 2015, which is what the Office for Budget Responsibility forecast in July.
On the public-finance front, it now looks highly probable that the chancellor will clearly miss his fiscal targets for fiscal year (FY) 2015/16. Following year-on-year (y/y) deterioration in October, public-sector net borrowing excluding banks (PSNBex) was only down by 10.9% over the first seven months of FY 2015/16 to GBP54.3 billion from GBP60.9 billion in April–October 2014.
Consequently, Osborne now has an almighty task to meet his fiscal targets for FY 2015/16. Indeed, if the pattern of the first seven months of the fiscal year continued, PSNBex would amount to GBP80.3 billion in FY 2015/16, which would mean that Osborne would overshoot the target of GBP69.5 billion in his July budget by some GBP11 billion. Or to put it another way, barring major revisions, PSNBex needs to be limited to GBP15.2 billion between November and March to meet the chancellor’s current target of GBP69.5 billion. This looks a huge ask, as it would be a drop of GBP14.0 billion (47.9%) from the GBP29.2 billion shortfall seen during November 2014–March 2015.
Furthermore, with the economy seeing GDP growth slow in the third quarter, there is the risk that tax receipts could undershoot going forward.
Tax-credits below and terrorist attacks in France add to chancellor's problems
The chancellor’s fiscal planning has been complicated by the House of Lords rejecting his plans to cut GBP4.4 billion of spending on working-tax and child-tax credits because of concerns over the impact this will have on the lowest paid. The GBP4.4-billion cut is part of the GBP12 billion in savings that the chancellor was looking to make in social security.
Among the measures that the chancellor is likely to take to offset this is further reductions to housing benefits.
In addition, heightened concerns over the terrorist risks facing the United Kingdom after the attacks in Paris are putting pressure on the chancellor to ease the squeeze on the police budget and to find more money to tackle terrorism. Prime Minister David Cameron has announced that an extra GBP2 billion will be spent on the military during this parliament while the chancellor has announced that he will increase spending on UK cyber security to GBP1.9 billion by 2020.
In the Spending Review, the chancellor is looking for another GBP20 billion in spending cuts during this parliament’s lifetime. It was reported earlier this week that spending cuts worth GBP4 billion had been agreed on by seven government departments.
Growth and fiscal forecasts
In the July budget, the Office for Budget Responsibility forecast that PSNBex would fall to GBP69.5 billion (3.7% of GDP) in FY 2015/16. PSNBex was projected to come down to GBP43.1 billion (2.2% of GDP) in FY 2016/17, GBP24.3 billion (1.2% of GDP) in FY 2017/18, and GBP6.4 billion (0.3% of GDP) in FY 2018/19. A surplus of GBP10.0 billion (0.4% of GDP) is expected for FY 2019/20.
The structural current budget balance was seen falling from 2.4% of GDP in FY 2014/15 to 1.7% of GDP in FY 2015/16 and 0.5% of GDP in FY 2016/17, before surpluses are achieved in FY 2017/18 (0.3% of GDP), FY 2018/19 (1.1% of GDP), and FY 2019/20 (1.8% of GDP).
These public finances were based on GDP growth of 2.4% in 2015, 2.3% in 2016, and 2.4% in 2017. Growth was seen holding at 2.4% during 2018–2020. These forecasts currently look perfectly defensible. In fact, we expect growth will come in at 2.4% in 2015, and we forecast it to be 2.4% in 2016 and 2.5% in 2017.
While the growth forecasts contained in the July budget still look plausible, the fact that the shortfall on the public finances is likely to come in significantly higher than expected in FY 2015/16 raises questions about whether the targets further out can be achieved. On the positive side, the Office for Budget Responsibility is likely to revise down the costs of servicing the debt over the medium term because of lower interest rates.