The Autumn Statement: What to Expect
In two and half weeks time the Chancellor will make his Autumn Statement and the Office for Budget Responsibility will release its new forecasts for the UK economy. This Autumn Statement looks to to be very different in content and style to the more sombre affairs of 2011 and 2012.
For most of the last three years ‘fiscal events’ (as Budgets and Autumn Statements are often called) have followed a familiar script – the Chancellor gets to his feet, reads out a list of forecast downgrades and then announces a few giveaways (fuel duty freezes, corporation tax cuts, personal allowance increases) and a bigger package of austerity measures. Usually, no matter how grim the growth numbers, the Chancellor tries to play his weak hand to the best of his ability and strike an upbeat tone. This time he might actually have something to sound cheerful about, at least when it comes to headline growth and the deficit.
So what should we be expecting?
Given the fiscal framework in which the government operates, the policy content and wider politics of the Statement will be shaped by the OBR forecasts, so it is worth starting there.
To start with it’s worth noting that the OBR has somewhat unfairly gained something of a reputation as a rubbish forecaster that is best ignored. I think is unfair, the fact is the OBR is no better or worse at worse than most mainstream macroeconomic forecasters (which I’ll admit is damning with faint praise). At the point when its forecasts are issued the OBR tends to be roughly in line with what most other forecasters (the BOE, the OECD, IMF, various city houses, NIESR, consultancies, etc) are saying. The difference is that whilst the OBR only updates its forecast twice a year, others move them monthly or quarterly. So when the OBR issues a Budget forecast in March or April, by the time November or December (and the Autumn Statement) rolls around, it’s forecast tends to be looking quite dated.
In 2011 and 2012 this feature led to big downward revisions, whilst this year it will lead to big upward ones.
Growth & the economy
Assuming that the OBR continue to be roughly in line with the independent consensus (and I see no reason why they wouldn’t be) we can expect some fairly chunky revisions to growth. The current forecasts are for 0.6% GDP growth in 2013, 1.8% in 2014, 2.3% in 2015, 2.7% in 2016 and 2.8% in 2017.
I can see no real reason to make big changes to 2016 and 2017 (in fact they might revise these numbers down slightly as they revise up the years before – there is a base effect in this growth numbers) but 2013, 2014 and 2015 will see big moves upward.
Given the growth we have already experienced three quarters of the way into 2013, that 0.6% looks extremely low – we should probably expect something more like 1.6% which is roughly were the current consensus is.
2014 looks set to move from 1.8% to something closer to 2.3% (as the OECD forecast today), whilst 2015 might well move up 2.5% or even a touch higher.
There can be no doubt that this will be very welcome revisions although they will still leave the forecast well below where they initially were and in no way make up for the poor performance of the economy between 2010 and late 2012.
The wider numbers will no doubt also improve – unemployment to be revised down, inflation down and possibly wage growth up a bit reflecting lower unemployment. I won’t be at all surprised if the OBR now expected real wage growth to turn positive (after an unprecedented squeeze) in the first half of 2014.
In terms of the composition of growth, I expect the forecasts to show growth driven by consumption in 2013 and early 2014 before business investment begins to pick up in late 2014 (whether or not this will happen is an open question, but I expect that is what the forecast will show).
So, I expect overall the economic forecast to show sustained and increasing growth and a marginally better picture of living standards with weak real wage growth in 2014. Of course GDP per capita in 2015 is likely to be below 2010 (let alone 2008) levels and the ‘real wage gap’ from peak will remain substantial. A large improvement in output will not lead to a strong gain for living standards.
Stronger growth will mean a lower deficit. The public finances are beginning to improve as output growths although progress has been far from linear. We’ll get further clues as to the likely OBR revisions with the next set of public borrowing figures on Thursday but at this stage it is not taking too much of a chance to state that the headline deficit numbers for 2013/14, 2014/15 and 2015/16 will be revised down.
The current estimates for those three financial years are public borrowing of £120bn, £108bn and £96bn. If I were a betting man I’d hazard a guesstimate of new numbers of around £105bn, £90bn and £80bn.
In other words faster growth could reduce borrowing by around £15bn a year relative to previous forecasts. (These numbers are subject to change depending on Thursday’s outturn).
The structural deficit
Given the central role of the structural deficit in the government’s fiscal rules, what happens to the structural deficit is of huge importance. Economists often note that the size of the structural deficit is subject to ‘particular uncertainty’ , to which I would add that the OBR’s method for calculating it is now also subject to a ‘particular uncertainty’.
As I wrote over the summer (at some length that I wouldn’t repeat here and see also Ian Mulherin on the same topic) I strongly suspect that the OBR will react to stronger growth by revising up its estimate of the output gap and hence down its estimate of the structural deficit. As Ian wrote this summer:
If estimates of the economy’s future potential were revised up by, say, two per cent, the £33bn hole in the government’s finances could all but disappear. It’s far too early to say whether such a large revision is likely.
For what it’s worth I think this will actually happen but I don’t expect such a substantial revision at the Autumn Statement. The OBR will, quite rightly, want to see a lot more evidence of productivity growth before making such large revisions to its output gap estimates, but I expect the process will begin this December with the first of many downward revisions to the size of the structural deficit.
Further moves can be expected at Budget 2014 and next year’s Autumn Statement.
The size of the ‘black hole’ in the public finances is set to get a lot smaller (and again, this is why I prefer to mentally replace any mention of the ‘structural deficit’ with the ‘highly uncertain and subject to revision structural deficit’ and why I think the SD is a poor target for fiscal policy makers).
The politics & policies
If I’m halfway right on the likely changes to the forecasts then this obviously opens up space for rather more giveaways than in previous years. Some have already been announced (free school meals for some children, marriage tax breaks), some are rather easily guessable as they happen ‘even in the bad years’ (fuel duty freezes and further corporation tax cuts) and some are being heavily trailed at the moment (something on energy bills, something around stamp duty and maybe a further rise in the personal allowance).
Hopi Sen has already ghost written a plausible speech for the Chancellor that is focussed on targeted giveaways to ‘hard working people’ whilst maintaining a politically divisive squeeze on social security spending. I suspect we will see a lot of this sort of stuff but I do think Hopi is wrong on the timing, most of his list would seem to me to fit more into Budget 2014 and next year’s pre-election Autumn Statement rather than this December’s.
Either way, what the new forecasts will reveal (and what the continuing improvement in the structural deficit position will point to) is that much of the political debate of the past three or so years has been unnecessarily fatalistic. There has, for many, been an assumption that the public finances are structurally impaired when in reality a lot of the problem was merely cyclical. The US example here is instructive – for all the handwringing about a ‘fiscal collapse’ the deficit is actually falling substantially and faster than most observers expected.
The UK experienced a very deep recession and a very weak recovery – this led, unsurprisingly, to a large deficit. As the recovery picks up pace the size of that deficit will fall. As Dan Corry put it a year ago:
… how quickly the deficit and debt will come down when and if UK and EU growth kicks in is very hard to say. Economists are hopeless at forecasting this sort of thing but historically tend to severely underestimate how quickly deficits rise in a recession and how fast they fall in an upturn.
We may all be surprised by how quickly the ‘black hole’ of the structural deficit which has dominated much of the politics of the past few years turns out to not be quite such a big problem.