The Chancellor’s forecast of economic growth and public finances show we are in for a bumpy ride: The Office for Budget Responsibility’s forecasts show growth slowing and the public sector deficit growing. Tax receipts are down and government borrowing will increase.
Alongside this, is greater uncertainty and instability – largely triggered by the UK's historic vote to leave the EU and compounded by wider global trading conditions. This uncertainty is beginning to manifest itself in declining levels of business confidence since the referendum and the OBR has forecast that this will turn into reduced business investment.
The OBR noted that there is greater uncertainty around its growth forecasts than usual. Of course this means there could be an upside as well as a downside. Or just significant volatility.
It is for this reason that the Chancellor gave himself greater room for manoeuvre in the future – by revising his fiscal rules; tearing up the plan to balance the books by 2020. This allows him to spend more if need be in the event of a downturn or falling tax receipts. It gives him ballast for the choppy waters ahead.
His fiscal flexibility also gave him some room to increase spending now – he is using this cautiously and in a targeted way. He emphasised that all additional borrowing will be invested in measures to raise productivity: investment in infrastructure and innovation, to unlock growth across the UK. His focus on ‘shovel ready’ projects like local transport schemes, as well as broadband and housing will give a fiscal stimulus in short term, getting money into the economy. In the long term they are designed to support greater productivity and unlock long term business growth – addressing some of the structural issues in the UK economy which in part account for weaker performance and public finances. In effect he is following the approach advocated by many in recent years to take advantage of low interest rates to borrow money to invest in infrastructure. But he is doing so cautiously for now – allowing room to do more if the economic conditions get tougher and allowing him to reduce the deficit if conditions improve.
Only time will tell if a bolder strategy is needed. For now, it seems a shrewd and sensible approach that gives a very British message of ‘keep calm and carry on’.
Mr Hammond said the statement - his first major Commons event as chancellor - came exactly five months after a Brexit vote which "will change the course of Britain's history", making it "more urgent than ever" to tackle long term economic weaknesses.Presenting the Office for Budget Responsibility's forecasts, he said borrowing would hit £68.2 billion this year and £59 billion next year compared with the March forecast of £55.5 billion and £38.8 billion.The OBR said the referendum result meant potential growth in the current Parliament would be 2.4 percentage points lower than forecast in March. Government finances are forecast to be £122bn worse off than in the spring.