The drama of the Commons took a back-seat to the economic musings of the OBR today


Unusually for a fiscal event so close to an election, today’s Autumn Statement was never expected to be about giveaways and grand schemes. Indeed, the politics in the Commons took a back-seat to the economic musings of the OBR. The two key questions we wanted answered? First, how would the outlook for public finances – and for the still-sketchy fiscal plans set out by each of the main political parties – change? And secondly, would the shape of the recovery alter over the coming years, shifting from being jobs-rich but revenue-weak to instead being productivity- and wage-growth generating?

On the first of those questions, the OBR has revised up its estimate of the budget deficit this year. But the key targets remain in place. The Coalition’s current fiscal mandate requires it to be on course to eliminate the cyclically-adjusted current budget (CACB) within a rolling five-year period. As things stand, the CACB is projected to be in surplus to the tune of £46 billion by 2019. Later this week, the Coalition is expected to shift the target date to 2017-18 in the updated Charter for Budget Responsibility. That measure too is forecast to be surpassed, with a CACB surplus of £13 billion included in the OBR figures.

And the overall budget surplus that the Chancellor had indicated would become the focus of a future Conservative government is also still projected to be achieved – £4 billion in 2018-19, rising to £21 billion by 2019-20.

Achieving these various surpluses levels is expected to require fiscal tightening of around £34 billion in 2016-17 and 2017-18 (£22 billion would be needed simply to reach break-even in the current budget), rising to around £47 billion by 2019-20. All of this comes on top of the £8 billion of departmental spending cuts already agreed for 2015-16.

Given that today’s figures go well beyond the targets set out by the Coalition and the Chancellor, there is clearly scope for each of the parties to do less than this implies.

Although the Conservatives have been clear about wanting to “balance the books” by 2018, they haven’t specified a surplus. Labour have pledged to secure a current budget balance “as soon as possible”. By excluding the capital budget (£25 billion-£30 billion a year), they clearly have significantly more wriggle room. If they wanted to push the date back beyond the point favoured by the Coalition into 2018-19 or even 2019-20, then clearly they would have yet more space. And the Liberal Democrats are likely to come somewhere in between: while they’re wedded to the Coalition plan of achieving balance on the current budget by 2017-18, thereafter they intend to switch to a target that excludes some portion of capital spending.

These potential differences in scale are very significant. But it remains the case that whatever scale of consolidation each party wants to deliver post-election, there are difficult choices ahead. And the job looks harder still if we factor in promises of tax cuts and extra funding for the NHS. As yet, we’ve had very little detail about just how each party would achieve the required tightening: what mix of spending cuts on – welfare and on public services – and tax rises are voters choosing between in May? The ‘candour deficit’ displayed by the various parties needs closing even more quickly than the fiscal one.

So what of the shape of the recovery? The OBR appears to be pointing to a gradual transition over the coming years. It expects unemployment to continue its sharp downward trajectory through to 2016, before plateauing at around 5.3 per cent through to 2019 – pretty much where it said it would be at the time of the Budget. In contrast, the earnings growth projection has been subject to a sharp downward revision in 2014 and 2015, reflecting the disappointment of wage data this year and an acknowledgement that today’s sluggish pay recovery is set to persist. It is expected to rebound a little from 2016 however, outpacing inflation by around 2 per cent by 2017.

Our take on the OBR numbers – averages remember – is that they imply that typical (median) pay won’t recover its pre-crisis level before the end of the decade. Median weekly pay stood at £415 in April 2014; our projections point to a meagre £25 improvement measured against CPI: a return to 2003 pay levels. Use RPIJ inflation instead (which includes mortgage interest costs) and the improvement over the next five years stands at just £6. That would leave pay back at where it was in 2000 – nearly two decades of lost pay growth.

There was better news on rebalancing in the economy, with the newly revised figures showing that business investment accounted not for 10 per cent of economic growth that has occurred since 2009 as had been suggested at the time of the Budget, but for 23 per cent. Nevertheless, the OBR slightly downsized the contribution investment is expected to make to growth in the coming years relative to previous projections, meaning that household consumption is again expected to account for more than two-thirds of the total.

With wage recovery set to take some time, that corresponds to a very marked increase in the expected household debt to income ratio. As the chart below shows, the OBR forecasts that it will start climbing from its current level of 146% of income to a new high of 184% by the start of 2020 – well beyond the pre-crisis peak of 170%.

Household debt to income ratio 



Interest rates are expected to remain lower for longer, meaning that servicing such a level of debt should prove easier than might otherwise be the case. But clearly questions will be raised about the sustainability or otherwise of another dose of debt-fuelled growth.

And of course, there had to be some giveaways today. Some were very welcome (like the sweeping changes to Stamp Duty, and the introduction of postgraduate loans and measures on avoidance), but others were lamentable. The erosion of work incentives associated with reducing work allowances in universal credit will go largely unnoticed, but will hit lower earners hardest. On the flip side, the additional increase in the personal allowance and the higher rate threshold will spark positive headlines about taking people “out of tax”, but the reality is that three-quarters of the £530 million cost will go to households in the top half of the income distribution. The five million lowest paid workers will gain nothing at all. It was inevitable that politics would play its part.