Open Britain's response to the Autumn Statement

This is a short background note on the main Brexit-related news  in today’s Autumn Statement.

This was the first glimpse of the cost of Brexit: higher borrowing, lower growth, higher inflation, lower productivity. The Chancellor said Britain didn’t vote to be poorer, but we already are. And it revealed a government, despite bullish rhetoric about future potential outside the EU, planning for a turbulent future. 

This was Philip Hammond’s debut and he gave a calm and competent performance, eschewing much of the theatre of his predecessor. The new Chancellor is rightly being given a lot of credit for clearly outlining the economic data with no smoke and mirrors. Some small but significant measures were offered to help the ‘just about managing’, and their distributional impact will be dissected, but there was no way to distract from the main news.

The OBR showed that borrowing will increase by a total £122bn cumulatively 2016/17-2020/21. The central point, however, is that the OBR isolated the impact on borrowing from the vote to leave the European Union, which totals £58.7bn – or £226m a week. This is based on forecast higher inflation, lower productivity, lower migration, lower growth and higher interest rates resulting from the uncertainty surrounding the decision to leave and Article 50 negotiations.


The Autumn Statement underlined three key things.

First was that the threat of our economy being less open as a result of our leaving the EU will hit working people’s living standards, business investment and growth. The OBR is clear that leaving the EU will erect trade barriers and will reduce our overall global trade, which will have wider negative consequences. If our priority is to protect prosperity and mitigate the costs of leaving, our response must therefore be to ensure we protect open trade, which means being within the single market and judging our role in the customs union on a genuine analysis of the costs and benefits of leaving.

Second was that migration is a real benefit to our economy and we should not fall for rhetoric which says otherwise. A reduction in migration is forecast to increase borrowing, and that reduction is lower than the Government’s set target. This underlines the need for a culture-shift in this country that values migration, rather than indulging scapegoating or setting implausible policies.

Third, the uncertainty which underpinned much of the OBR’s forecasts and which has led to political attacks on the OBR derives from a lack of clarity about the Government’s intended outcomes for forthcoming negotiations. The Autumn Statement was an opportunity to provide greater clarity over vital trade and migration issues, but no detail was forthcoming. ‘No running commentary’ has run its course. A clearer direction of travel from Ministers would calm business and investment and could begin the process of uniting the country.

Key Brexit-related announcements

  • Trade with the EU and non-EU countries is set to fall over the next decade
  • A fall in migration will cost the UK £16bn and the ‘tens of thousands’ target will be missed
  • Business investment is set to fall, hitting productivity
  • A fall in Sterling will hit families’ incomes and will add 2% to consumer prices over the next two years
  • Growth will be 2.4% lower than it otherwise would have been over the forecast period
  • The cost of increasing capacity in Whitehall to deal with Brexit will be £412m


Key Brexit-related announcements

  • Trade will fall. While the OBR made no assumptions about the UK’s specific future trade relationship with the EU, they have examined independent reports on the impact of UK-EU trade and UK-non-EU trade and have concluded: “‘that the negotiation of new trading arrangements with the EU and others slows the pace of import and export growth for the next 10 years” (p.9). This undermines Leave campaigners’ core argument that leaving the EU’s common commercial policy and single market will open up new trading opportunities – remember we were repeatedly told new global trade opportunities would be available on the moment of our departure. 
  • Costly migration target will be missed. Traditionally OBR forecasts are based on Government policy. Uniquely, this one was based on the Government missing its central immigration target. The OBR’s assumption is “that the UK adopts a tighter migration regime than that currently in place, but not sufficiently tight to reduce net inward migration to the desired ‘tens of thousands’” (p.9). Open Britain believes this implausible target generates distrust in politics and fuels resentment of migrants who make a valuable contribution and must be dropped. Underlining the detrimental impact of the target, the OBR has shown that the lower migration levels it forecast add £16bn to national borrowing 2016/17-2020/21. If the Government were to proceed with their ‘tens of thousands’ target, therefore, this would worsen public finances even further. Indeed, the OBR say, “in the absence of the referendum result we would have revised up cumulative potential output growth by 1.0 percentage point due to higher net migration” (p.45)
  • Investment. The OBR is clear that the uncertainty surrounding the outcome of negotiations, not helped by the Government’s confusion over their direction of travel, is hitting inward investment, which in turn hurts productivity.  The OBR write: “the referendum result and forthcoming post-Article 50 negotiations have generated uncertainty for firms that will lead to some investment being postponed or cancelled. We have revised business investment down relative to our March forecast in all years, which also reduces trend productivity growth due to slower capital deepening” (p.9).
  • Consumers hit. The OBR confirmed that the fall in Sterling that followed the referendum result has led to an increase in consumer prices: “the fall in the pound will squeeze households’ real incomes by pushing up import prices. We expect the pound’s fall to add almost 2 per cent to the level of consumer prices over the next two years, relative to our March assumption. Real earnings growth will consequently fall close to zero next year” (p.9).
  • Cumulative lower growth. The OBR make clear that the above factors that derive directly from the vote to leave the EU have led to a downgrade in the growth forecast: “reflecting our assumptions about the effect of leaving the EU on business investment and net migration, we have revised cumulative potential output growth down by 1.5 percentage points relative to March and 2.4 percentage points relative to where it would otherwise have been (1.4 and 1.7 percentage points respectively on a per capita basis)” (p.45). 
  • Cost of bureaucracy. Leaving the EU was supposed to be a bonfire of red tape, but the process of leaving will in fact cost the taxpayer £412m for increasing the capacity of Whitehall. The key section reads: “Additional resource will be provided to strengthen trade policy capability in the Department for International Trade (DIT) and Foreign and Commonwealth Office, totalling £26 million a year by 2019-20. There will also be additional resource of up to £51 million in 2016-17 for the Department for Exiting the European Union to support the re-negotiation of the UK’s relationship with the European Union. Up to £94 million a year of additional resource will be allocated from 2017-18 until the UK’s exit is complete. In total this will mean up to £412 million of additional funding over the course of this Parliament. (p.31)”

Planning for the future

The Government made clear that these factors have implications for the future.

Firstly, the Chancellor said in this statement that “the government will review public spending priorities and other commitments for the next Parliament in light of the evolving fiscal position at the next Spending Review”, implying that a worsening of public spending forecasts is on their planning horizon and could lead to cuts in spending.

Secondly, the first of the Chancellor’s three new fiscal rules only commits the Government returning the public finances to balance “as early as possible in the next Parliament”. Failing to specify a year by which this will be achieved shows the Chancellor wants to avoid any hostages to fortune and has built himself in some flexibility in an uncertain climate.

However, there was no reassurance for those of us who are concerned that the Government has no plan for Britain post-Brexit. The OBR says that, as it has a legal requirement to produce its forecasts on the basis of current Government policy, they asked the Government in September for “a formal statement of Government policy as regards its desired trade regime and system of migration control, as a basis for our projections”. They received back the Government’s standard holding lines and elaborated no further on the information that is in the public domain.

Summary: key forecasts

  • The economy will be 2.4 per cent smaller by 2020-21 than forecast in March, with growth slowing to 1.4 per cent in 2017 and 1.7 per cent in 2018.
  • The OBR estimates that the direct impact of Brexit on the public finances is £58.7bn – £226 m a week.
  • Government borrowing is expected to be £122 billion higher than forecast in March, with borrowing expected to be £68.2bn this year and £59bn next year compared with the March forecast of £55.5bn and £38.8bn. Debt as a percentage of GDP will rise from 87.3 per cent this year to 90.2 per cent in 2017/18.
  • Expected business investment figures have been revised down by 4.7 per cent in 2016, 6.3 per cent in 2017 and 1.8 per cent in 2018.
  • Unemployment is expected to increase from 4.8 per cent currently to 5.5 per cent by the end of 2018.
  • CPI inflation next year is expected to be 2.3 per cent, up from the previous forecast of 1.6 per cent, while the prediction for 2018 is up from 2 per cent to 2.5 per cent. 

Summary: key Government announcements

  • Reducing the taper rate at which Universal Credit is withdrawn from people when they start work from 65 per cent to 63 per cent.
  • Banning upfront fees imposed by lettings agents in England.
  • Increasing the National Living Wage to £7.50 an hour from April 2017. However, this was lower than the rise to £7.60 that was indicated before the Autumn Statement.
  • An investment of £23bn, to be spent over the next five years, on a new ‘National Productivity Investment Fund’, aimed at improving UK productivity.
  • £1.4bn aimed at delivering 40,000 new affordable homes in England.
  • £2bn extra investment in science by 2020.
  • £1.3bn more to improve roads.
  • Cancelling the fuel duty increase for the seventh year running.
  • Confirming the government would raise the personal allowance to £12,500 by 2020 after which it would increase in line with inflation rather than in line with the rise in the minimum wage.
  • And that the higher tax band will rise to £50,000 by the end of the Parliament.