For his first Autumn Budget, the Office for Budget Responsibility has given Philip Hammond a truly catastrophic set of economic forecasts. After a decade of unrealised productivity forecasts, the OBR has now delivered the mother of all downgrades; all but halving its view of the UK’s capacity to grow. As a result it now expects the economy to grow by an average of just 1.4 per cent a year over the coming five years, leaving our economy 2 per cent smaller in 2022 than it previously expected.
Lower productivity growth drives borrowing up £91 billion over the forecast period. Even with some compensatory changes on employment, the OBR has told the Chancellor that forecast changes mean he should expect to be borrowing £13.7 billion more in 2020-21. In the face of those downgrades the Chancellor has decided not only to accept the lost ground, but to actually further increase borrowing.
As a result, the ambition to see significant reductions in public sector net debt has also gone out the window. It is now forecast to remain around 80 per cent of GDP through to the end of the forecast period. We appear to have a new normal for government debt that runs at precisely double the pre-crisis level of 40 per cent. And even those debt levels are dependent on avoiding another downturn, which history teaches us is unlikely.
Significant as these fiscal downgrades are, they still leave the Chancellor with £14.8 billion headroom against his fiscal target for cyclically adjusted borrowing to be below 2 per cent of GDP in 2020-21.
That headroom is however only being bought by an ongoing programme of austerity. Real spending per person is set to be 1.4 per cent lower in 2022-23 than in 2008-09, an unprecedented stagnation. Within those totals capital spending by government departments is set to increase significantly in the years ahead, while day-to-day resource spending per person now looks set to fall by a further 4 per cent by 2022-23. That includes a penciled in, but unallocated, £4.7 billion additional cut announced yesterday.
While the outlook for the public finances is bad, it is not quite as bad as some were expecting. Unfortunately, the future for family finances implied by yesterday’s forecasts is unremittingly grim. Lower productivity feeds through directly to pay, which is now forecast to be £1,000 a year lower on average than the OBR thought back in March. We project that this would mean average pay not recovering to its pre-crisis peak until 2025 – 17 years after the pay squeeze began.
The pay downgrade feeds through into weak projections for family incomes. Disposable income per person is now set to be £540 lower by 2022 than previously expected, with the current fall in real incomes set to continue and to become the longest on record. Indeed the OBR projects that the current period of falling incomes will last 19 quarters: longer than the (deeper) income squeeze recorded in the immediate aftermath of the financial crisis.
Welcome steps were taken to shorten the time period people wait for their first Universal Credit payment, to make it easier for families to draw down bigger advances, and reduce the risk of rent arrears for those moving onto Universal Credit from Housing Benefit.
But the Chancellor has chosen to press ahead with major cuts to working-age benefits in the next few years. Universal Credit remains significantly less generous than the legacy benefits it replaces and working-age benefits are being frozen during a period of relatively high inflation. The decision to push ahead with these cuts means that while Philip Hammond is the Chancellor, the tax and benefit policies being delivered are those of his predecessor George Osborne. On average, we expect the combined impact of policies announced from the Summer Budget 2015 onwards to leave the poorest third of households an average of £715 a year worse off by 2022-23, while the richest third of households will be an average of £185 a year better off.
Different household types are affected differently. Looking purely at the economic forecast changes in the Autumn Budget, a low paid dual-earning couple with children are set to be £280 a year worse off in 2022-23 from higher inflation increasing the effect of the benefit squeeze and weaker pay growth. Accounting for all economic and policy changes from the Summer Budget 2015 onwards, some working families face losses of up to £4,000.
The decision to put longer-term living standards and the intergenerational priority of housing at the centre of the Budget is welcome. Moves to invest significantly more in house building look set to return capital spending on housing above the levels than seen in the 2000s (outside of the fiscal stimulus peak of 2008-10). This should drive significant progress towards the government’s target of building 300,000 homes a year. Actually achieving it will require a more active role for the state, not least in building more homes for social rent.
The biggest single housing measure however – scrapping stamp duty for first time buyers of property worth up to £300,000 – had nothing to do with increasing the supply of housing, and instead focused on supporting demand. Despite costing nearly £600 million a year, the OBR expects this policy to lead to just an extra 3,500 first time buyers who would not otherwise have become home owners. That equates to a unit cost of £160,000 per additional owner – sufficient to have actually bought them a typical property outright in 26 per cent of local authorities across England and Wales.
Faced with a grim economic backdrop the Chancellor has played his hand well and will certainly see this Budget as a political success. But from the perspective of British families’ living standards it is hard to see it as such. We can but hope that the “bright future” hailed in the first line of the Budget document rings true, despite the forecasts.