November 26, 2016
On Wednesday, Philip Hammond delivered his first Autumn Statement as Chancellor of the Exchequer. Against a backdrop of Brexit and economic uncertainty and to an audience sceptical about the next few years, he chose to prioritise investment in infrastructure and innovation. FTI Consulting’s Public Affairs team takes a look at the key announcements.
Philip Hammond stepped out of 11 Downing Street – eschewing the usual media photo call outside the black door – for his moment on centre stage today having faced down months of attack from hard-line Brexiteers and the occasional hurdle in relations with the Prime Minister.
The Autumn Statement was his first as Chancellor (and would indeed be his last Autumn Statement as he was to announce), and it showed every sign of reflecting his approach to the job: cautious, unflashy and quietly confident.
The Chancellor focused his speech on productivity and infrastructure investment, including housing, as was expected and had indeed been widely briefed in advance. The morning’s papers had led with an announcement regarding the banning of letting agents’ fees which was aimed at being the win for the “Just About Managing’s” (JAMs) which the Chancellor announced as evidence that the Government believes in market-led economies, but will interfere when those markets fail consumers.
The “Three Brexiteers”, David Davis, Boris Johnson and Liam Fox were seated away from Hammond in what was reportedly “no accident”, and there was no getting away from the impact of Brexit on the Autumn Statement. The Chancellor focused on June’s referendum decision at the start, stating it brought into focus some of the key things the Government now needed to focus and address – the housing challenge, economic disparity and the productivity gap. He also used the economic forecasts – downgraded for 2017 but still showing an expectation of more growth than major European nations – to show the strength and resilience of the UK economy.
In light of these downgraded forecasts, the Chancellor announced new – and somewhat vague – fiscal rules which will mark a departure from the Osborne era. First, public finances should be returned to balance as early as possible with cyclically-adjusted borrowing below 2% by the end of the parliament; second, public net debt must be falling by the next election; and last, welfare spending must be within a cap. Now that the 2020 deficit reduction target will be missed, markets are unlikely to like the lack of a specific date for deficit eradication.
Early on in his speech, the Chancellor stated that unlike his predecessor he was unlikely to “pull a rabbit out of a hat”. Indeed, apart from a slightly eccentric announcement around funding for an historic Northern (non-Power) house, it seemed no surprise would come. Indeed, his final flourish – that this Autumn Statement would be the last – was predicted by several parties including FTI Consulting in our briefing earlier this week.
Answering for the Opposition, this was Shadow Chancellor John McDonnell’s second Autumn Statement. After paying tribute to Jo Cox MP, whose murderer was sentenced during the course of the Statement, McDonnell focused on lack of investment in health and education and on the lack of affordable housing supply.
In recent years there have been two types of Chancellor. Those like George Osborne and Gordon Brown, who dominated domestic policy and used the Treasury’s influence to have input across Government, as well as acting as the party’s chief political strategist; and those like Alistair Darling, who stuck more closely to the Treasury’s traditional role of setting economic policy and managing the public finances.
Hammond falls very clearly into the latter camp. But whilst the new Chancellor praised the “strength and resilience” of the UK economy since the Brexit vote, the GDP growth forecasts he announced from the OBR show it has not been unscathed. Indeed, the OBR forecasts a £220bn increase in the national debt by end of this Parliament to a staggering £1.945 trillion.
The fiscal forecasts were markedly worse than in March: in 2020/21, public sector net borrowing is now forecast to be £20.7bn; in March the forecast was for an £11bn surplus. The OBR now expects government borrowing this financial year alone will be £68.2bn, well above the previous estimate of £55.5bn. A forecast for the public finances to be back in surplus by the end of the decade was abandoned by the Chancellor and in total the new forecasts amount to £122bn of extra borrowing over the next five years – compared with the outlook before the UK voted to leave the EU.
Public sector net debt is also forecast to be higher: it will now continue to rise as a share of GDP, peaking at 90.2% in 2017/18. In March, debt was projected to start falling as a share of GDP this year, and be down to 81.3% by 2017/18. Growth forecasts were also cut the next two years; in 2017 to 1.4% (down from 2.2%) and in 2018: 1.7% (down from 2.1%).
The OBR noted that the Chancellor has failed to hit any of George Osborne’s old targets, but is now on track to meet his new fiscal targets. The Conservatives were elected in 2010 on a pledge to balance the books in five years. The new Chancellor has now confirmed the government cannot do it in ten.
On productivity, Hammond said the gap is “shocking” – the UK lags behind the US and Germany by 30 points, France by 20 points and Italy by 8 points. Raising productivity is “essential” and Hammond announced he is forming a new £23bn National Productivity Investment Fund to spend on infrastructure and innovation over the next five years.
There were further pledges (and some re-announcements) on £1.1bn for local transport networks in England; £220m to address traffic pinch points on strategic roads; £450m on digital signalling on the railways and £390m to help research on low emissions and driverless cars. In keeping with the Prime Minister’s recent comments that she wanted the UK to have the lowest corporation tax rate in the G20, corporation tax was cut to 17%. The lowest tax threshold will be increased to £12,500 and the higher rate threshold will rise from £45,000 next year to £50,000 by the end of this Parliament. Any Tories hoping for wider tax cuts were to be disappointed.
For the JAMs, Hammond announced an increase in the National Living Wage from £7.20 to £7.50 an hour from April 2017, slightly below the £7.60 figure that the OBR estimates would be necessary for it to stay on course to match the pledge of £9 an hour by 2020. The ban on letting agents’ fees – see the Infrastructure section – was also targeted at them.
Although there were no substantive announcements for financial services, the Chancellor did make new commitments that dovetailed the Government’s broader narrative of underpinning business growth while ensuring that a more “responsible capitalism” is reflected in both policy and practice. For instance, the Chancellor committed £102 million of LIBOR fines over the next four years to support Armed Forces and Emergency Services charities. While the “banker bashing” culture has largely dissipated from political discourse, the announcement nevertheless provides the Government with an example of how it is simultaneously holding wrongdoers to account and using the financial proceeds to support charitable causes – a useful, though not major, means of blunting opposition attacks over Conservative intimacy with the financial services industry.
Acknowledging the increasingly pertinent need to tackle the lack of successful scale-ups of British businesses, the Chancellor announced that an additional £400 million in long-term funding was to be made available to the British Business Bank (BBB). According to the BBB, the investment – which is to be channelled through its Venture Capital Programme – will be used to provide a crucial financial boost to those innovative start-ups “embarking on their ambitious growth journeys”.
While these announcements are clearly welcome and demonstrate that the government understands what is required to secure the long-term vitality of Britain’s investment environment, the Chancellor failed to mention any new commitments which related to protecting and indeed enhancing the UK financial services sector in light of the Brexit vote. Given that so much uncertainty remains over passporting rights and access to the Single Market and Customs Union, it is perhaps regrettable that the Autumn Statement did not provide credible assurances for the financial services industry, either in terms of the Government’s negotiating intentions or with supportive policy announcements.
Indeed, with the European Commission today publishing new proposals that would ring-fence foreign bank capital and force global investment banks and their subsidiaries to hold additional liquidity within the European Union, the Chancellor could have used the Autumn Statement to declare the UK’s position and warn against unnecessary fragmentation of global financial rules – which in turn could damage the City of London attractiveness as a destination following Britain’s withdrawal from the EU.
Although the Commission’s provisions are in retaliation to similar action undertaken by the United States, the ensuing regulatory tensions may have the potential to put at risk Britain’s pre-eminence as a financial centre post-Brexit, a development which the Chancellor and more broadly the government need to prevent from happening.
Finally, the government’s commitment to FinTech will continue with the publication of an annual “State of UK FinTech’ report forthcoming. There will also be a new network of regional FinTech envoys, as well as agreement to modernise guidance on electronic ID verification to support the use of technology to access financial services, mindful of the thorny relationship this can often have with Anti Money Laundering (AML) legislation.
As widely anticipated – and forming a core part of the government’s plan to help the JAMs and close the productivity gap – addressing the housing challenge was a central element of the Chancellor’s address. More so than in the Osborne era, Hammond placed a particular emphasis on supply-side issues with the announcement of a major house building package which includes an additional £1.4 billion to provide 40,000 affordable homes by 2020-21. This in addition to more flexibility for developers in how they use existing government affordable housing grants and a £2.3 billion Housing Infrastructure Fund to support the development of infrastructure for up to 100,000 new homes in high demand areas.
Demand-side issues were also addressed by the Chancellor, with the most headline grabbing policy, the news that letting agents are to be banned from charging fees to tenants, which currently average £337 according to Citizens Advice. The aim is to ensure renters’ ‘money goes further’, and follow calls from both the Labour Party and Liberal Democrats before the European Referendum for the same measures.
All of these measures are expected to form the basis of the government’s Housing White Paper which is due to be published later this year, with much of the funding being drawn from the government’s new National Productivity Fund of £23 billion to be spent on improving productivity through investment in housing, transport and digital communications, alongside R&D.
Beyond housing, the UK’s wider infrastructure needs also received considerable attention and funding, with the Chancellor committing to ‘high value investment’. £1 billion was set aside to unlock a ‘gold standard’ of superfast broadband and create world-class digital infrastructure – with a focus on the UK spearheading the development and trial of 5G, and expediting full-fibre connections for businesses and homes. £1.1 billion of the National Productivity Investment Fund was also earmarked for road and transport projects, with the aim of relieving congestion and delivering upgrades on local roads and public transport networks.
The government renewed its commitment to support “the future of transport” pledging £390 million in support of low emission vehicles, renewable fuels and autonomous vehicles. Moreover, assurances were made to support the roll out of smart ticketing on the UK’s transport routes, as well as pledges to increase funding on train infrastructure.
A larger scale commitment and review of infrastructure was also outlined, with the National Infrastructure Commission receiving an uplift in funding to over 1% of GDP by 2020-21 – with an invitation for the Commission to set out its recommendations on how best funds be spent over the next decade – and the Infrastructure and Projects Authority set to lead a review to identify ways that government, working with industry, can improve the quality, cost and performance of UK infrastructure.
Like his predecessor, Hammond also called for an economy where ‘every part of the UK contributes and is a part of its success’ and for investment beyond London. A range of measures were outlined to support devolution, including a third round of Growth Deals to Local Enterprise Partnerships (LEPs) across England worth £1.8 billion, borrowing powers for combined authority mayors, potential lending of £1 billion to local authorities, and the transfer of fresh powers to London and Greater Manchester. Wales, Northern Ireland and Scotland also received attention with updates on potential deals across all three nations.
The Chancellor had little to say for the energy sector, notably failing to signify any measures to address the core of the country’s energy challenges: the lack of reliable, large scale new build generation capacity. Noting the considerable investment needed to address this challenge, as expected he endorsed previous policies (Shale, Smart Energy Systems) and committed to outline plans for the future of the Levy Control Framework at the next Budget 2017 in the framework of an emission reduction plan.
As the country’s domestic gas production in the North Sea continues to suffer from both structural issues and difficult market conditions, Aberdeen was looking to the Autumn Statement to provide some relief for the industry. Phillip Hammond will have disappointed despite committing his support to Driving Investment (the existing plan for the oil and gas ring-fence fiscal regime) and committing to simplifying the reporting process linked to the Petroleum Revenue Tax.
With increases in energy prices widely expected on the back the weakening of the pound many expected the Chancellor to signal his intention to increase competition in the retail energy market but he limited himself to committing to “keep a close eye on [it]”.
To the satisfaction of motorists and following George Osborne’s example the Chancellor announced his intention to scrap the planned rise in the fuel duty which was due to increase with inflation in April 2017. This satisfaction will be compounded by the further investments to be made in English transport networks including road upgrades (£1.1bn) to be outlined in detail by the Transport Secretary in the coming week. The measures will be well received by a significant group of Conservative backbenchers which had campaigned for more support towards motorists.
Shadow Chancellor John McDonnell made the omission of any policies around health or the funding of social care a key line of attack in his response. The only announcement was the government’s provision of a further student loan outlay for the 1,500 additional medical training places which the government promised to fund earlier this year, that are set to start in the 2018-19 academic year. John McDonnell lambasted Hammond for failing to address key concerns over the funding and the perceived underinvestment in the NHS. The Shadow Chancellor said the system was facing a crisis and would not be secure without long term funding.
Despite calls from some quarters, there was no mention of scrapping the Minimum Excise Tax proposed by George Osborne in the last budget. Alcohol and gambling were also left alone. The government did announce it will publish draft legislation for the Soft Drink Industry Levy in December 2016.
In a widely expected change called for by the likes of the International Monetary Fund, Institute for Government, the CBI, Chartered Institute of Taxation and the IFS, the Chancellor announced the government will move to a single major fiscal event each year, “bringing the UK in line with other major advanced economies”.
This will mean less frequent changes to the tax system, helping to promote certainty and stability, with tax changes announced well in advance of the start of the tax year. Consequently, Parliament will also be able to scrutinise tax changes before the tax year where most take effect. That said, the Finance Bill will continue to follow the Budget, as it does now
Finally, the Office for Budget Responsibility (OBR) is required by law to produce two forecasts a year. One of these will remain at Budget. The other will fall in the spring and the government will respond to it with a Spring Statement. The Chancellor has said that the government will consider longer-term fiscal challenges and start consultations on how they can be addressed. The government will retain the option to make changes to fiscal policy at the Spring Statement if the economic circumstances require it.
Markets anticipated a more sombre tone from the Chancellor this time around, following a series of recent warnings from the Chancellor about the difficult state of government’s finances. The FTSE fell 20 points during the speech, following the Hammond’s announcement of the OBR’s revised growth figures. However, the pound reacted positively to the Chancellor’s announcement of the government’s renewed focus on productivity and his post-Brexit plans for the economy.