After peaking at 3% this year, GDP growth is expected to fall to 2.4% in 2015. That is no surprise – indeed I have been predicting a slowdown next year for some time, and the sluggish performance of the UK’s major trading partners in recent months reinforces the view that broader economic conditions do not offer a favourable wind. The longer term projections for growth are for it to stabilise at between 2.2 and 2.4 per cent each year to the end of the decade. This probably has more to do with the structure of the econometric models used in forecasting – which tend to revert to a mean – than any serious assessment of the economics. We might be so fortunate, but equally we might, post-recession, be in a new world in which the secular rate of growth is slower than it was before.
The public finances are forecast to improve dramatically beyond the current year. Last year’s outturn was a deficit of £97.5 billion. This year’s is expected to be slightly lower, at £91.3 billion (down from £133.9 in 2010-11). But by 2016-17 it is expected to be only £40.9 billion, and the following year just £14.5 billion. In percentage terms – as a percentage of GDP, that is – the deficit is expected to be 5.0% in the current year compared with 8.4% in 2010-11. It is coming down, but slowly. If the recent strength of the economy were to be maintained, there may be scope for tightening the belt – but many indicators suggest that this year’s strong performance has been a blip, and the Prime Minister may well be right to suggest that ‘red warning lights are once again flashing’ in the economies of some of our major partners. In any event, the Autumn Statement provides little information about how the turnaround that is still sought in the public finances is to be achieved, not least because the changes in planned expenditures and revenues announced today imply only a small net gain.
Big money changes include an increase in personal tax allowances, a major reform of stamp duty (moving to a marginal rate system), a restriction on tax relief that banks can claim on losses made in the aftermath of the financial crisis, and new employer contribution rates for public sector pensions. Moreover, a scheme will be introduced to tax multinational enterprises that seek to declare profits overseas rather than face UK tax; how this will be implemented is unclear.
Certain items of specific public sector investment are worthy of note – the Sir Henry Royce Institute for advanced materials will attract £235m in Manchester, and a Big Data centre at Daresbury will attract £113m. These are significant investments in the North West – though the Alan Turing Centre on Big Data will be located in London (which some may see as perverse given his connection with Manchester). Further investment in the Northern Powerhouse includes infrastructure improvement, including road improvements in Merseyside and on trans-Pennine routes, HS3, and investment in other rail services.
While the Chancellor announced several public investment projects, the Statement is disappointingly thin on measures to promote business investment. There are minor changes to R&D credits, and proposals to extend the work of the British Business Bank, notably through an extra £400m under the Enterprise Capital Funds programme.
On the labour market, there are proposals to extend the National Insurance break for firms employing young workers to cover all workers under the age of 25 on apprenticeship schemes. While it is good to see the importance of youth training acknowledged, it is not clear that this is the best way to achieve progress in this area. The quality of many apprenticeship schemes remains an issue, and it is in any event not clear that incentives of this kind are efficient in view of the deadweight associated with providing a break to employers that would in any event have provided the training.
A particularly welcome innovation is the proposal for a loan scheme to finance taught postgraduate education. This will help end the current inequity that has made tuition at this level affordable (more or less) only to those with private resources.
Overall, the Statement is one with much detail to be pored over, but lacking a clear vision of the route ahead. The cuts that remain to be made in public spending are severe, and we still await information on where the axe is intended to fall.
