Living standards· Brexit & trade The big picture tomorrow will be about the consequences of Brexit, but don’t forget its causes 22 November 2016 by Torsten Bell Torsten Bell Like bad pop music, there is a predictable rhythm to all Budgets and Autumn Statements. That’s partly about the theatre on the day – a photo outside Number 11, Chancellor’s statement in the Commons (including the rabbit out of a hat announcement) and the opposition’s response (usually involving shooting foxes and recently Communist book club recommendations). More substantively, central to understanding the rhythm of these fiscal events is how the battle for the limelight plays out between the big macro-economic news contained in the forecasts for growth and borrowing, and the government’s micro-announcements on specific areas of policy. Some years the micro changes are the news – in 2012 the Pasty Tax competed with the controversial decision to cut the top rate of income tax from 50 to 45p to be the top news item. But in others changes to growth and borrowing forecasts take centre stage despite the best efforts of the Treasury. The 2009 Budget included radical plans to provide job guarantees for young unemployed people and a significant house-building boost which, unsurprisingly, couldn’t compete with the news that borrowing was forecast to double over the next year, reaching over 10 per cent of GDP. No one noticed the jobs or homes. Tomorrow will be more 2009 than 2012. Whatever clever wheezes the Treasury has dreamt up, the headlines will be growth down, borrowing up – and a row about whether those forecasts are too pessimistic about Britain’s post-Brexit future. That’s understandable given that we are likely to be looking at something in the region of £85 billion of extra cumulative borrowing. But just because the short term focus will be on what you might call the consequences of Brexit, that doesn’t mean the rest of the Autumn Statement won’t have a big impact on the future path of the government. That’s because alongside responding to the consequences of Brexit, the Chancellor will also need to address its causes. Specifically he will need to deliver on Theresa May’s key agenda to help ‘just about managing families’. How he calibrates this cause/consequence challenge will be the real test of the Autumn Statement – and the correct policy responses are in fact direct opposites. On the consequences of Brexit the OBR is going to give the Chancellor a whole heap of bad news on higher borrowing. The correct response to that is to do precisely nothing and accept that increase, for two reasons. The first is pure economics – in the face of a slower growing economy forecast from 2017 onwards significantly increasing the pace of spending cuts and tax rises would be unwise, not least given the slow pace of growth in much of the rest of the world. The second is one of political economy. Yes the OBR will forecast much higher borrowing and slower growth tomorrow, but they will do so with a huge degree of uncertainty. All forecasts suffer from that feature, but this more than most given both the lack of clarity about the form Brexit will take and the wide range of economic outcomes even a given Brexit outcome might deliver. In those circumstances now is a good time to wait and see. On the causes, Theresa May has said that it was the Brexit vote itself that delivered the bad news – that much of Britain feels like they are only just about managing and that some areas of the country feel left behind. In contrast to inaction on borrowing, doing something about this problem requires significant action. On the causes of Brexit, we know some things with much more certainty – here’s one: if the government does not act to change course on upcoming cuts to Universal Credit, the very just about managing families Theresa May is focused on will see big hits to their income. Just about managing families with children will be an average of £715 a year worse off by 2020, even after accounting for increases in the minimum wage, tax threshold, and government help with childcare. Many will lose much more – a couple with kids where one person works full time on the wage floor will lose nearly £2,000. Single parents could be hardest hit with reductions in the work allowance in Universal Credit alone costing them up to £2,800 a year. The chart above shows quite how damaging the tax and benefit policies inherited by the new government are – implying big takeaways from the entire bottom half of the income distribution, or the just about managing as we now call them. The answer here is pretty simple, you cannot talk about supporting just about managing families while going ahead with cuts to their incomes of this scale. This is the government’s chance to show they understand that and change course. The good news on this certainty is that it looks like the Treasury is set to act. The big question is whether they do so with sufficient verve and vigour. Simple tweaks to Universal Credit that leave in place most of these big cuts would be welcome in of themselves but also seriously problematic – demonstrating that the government knows it has a problem in this area but is not prepared to put right what a previous Chancellor and Prime Minister put in train. For example a small tweak to reduce the rate at which benefits are tapered away as families earn more would only see a full-time worker on the National Living Wage benefit by few hundred pounds – only slightly reducing the hit to just about managing families’ incomes that are coming down the track. Instead the Chancellor should reverse in full reductions to the Work Allowances to ensure that incomes are protected and that work pays. Such action, alongside expected and welcome investment in housing and infrastructure that should also provide longer term support to just about managing families, would set the right tone to the new government’s first fiscal event. The consequences of Brexit will top the headlines tomorrow, but how the Chancellor responds to the causes of Brexit will matter much more for the future of the welcome agenda Theresa May has staked out for herself. Indeed, action in response to the causes of Brexit, rather than the response to its consequences, will determine whether this government ends up having a real vision for a better Britain. Let’s hope they do.