The Autumn Statement delivered by the new chancellor of the Exchequer Philip Hammond is the first substantial financial statement made by the government since the BREXIT referendum result in June. Naturally the referendum and its consequences featured heavily in the announcements, but it is still clearly too early to make any definitive forecasts for the longer term.
The Office for Budget Responsibility predicted that growth would be 2.1% in 2016 and 1.4% in 2017. This weaker growth is attributed to lower investment impacted by uncertainty and reduced consumer spending due to higher inflation. While these figures represent a deterioration, the outlook is not as severe as projected before the referendum. This chimes with most forecasters who predict that BREXIT impacts will be smaller in the short-term but will perhaps be more considerable in the longer term. BREXIT has also impacted on forecasts for the public finances adding to both debt and deficits in the short term. The Government has therefore abandoned its target of reaching a budget surplus in 2019/20. There is now only a commitment to reach a surplus as soon as is 'practicably possible' within the next parliament. The OBR calculated that of the £122bn extra borrowing that will be required over the next 5 years, £58.7 or just under half of that deterioration can be attributed to BREXIT.
The forecasts for earnings were also downgraded to the extent that real average weekly pay will not reach its pre-crisis peak in 2020, as forecast in March. The deterioration is split between higher inflation and lower nominal pay with each accounting for half the overall decrease. Earnings will now be below their 2007 peak beyond the forecast period to 2021. An increase of 30p in the National Living Wage will give a boost to many low-paid workers, but this will not make up for the shortfall many working families will face arising from changes to tax credits when Universal Credit is rolled out across the country. The Chancellor did announce a small reduction in the taper rate at which universal credit is withdrawn, but this will not do much to alter what will be a significant reduction in these household's budgets.
The focus on productivity was a welcome feature of this year's Autumn Statement. This has been a perennial and persistent weakness of both the UK and the Northern Ireland economy. A commitment to increased Research and Development spending along with the creation of a £23bn productivity fund were bolstered by an increase in public investment which should see Northern Ireland benefit with an additional £250m of Barnett consequentials. While these actions are welcome it is not difficult to find them underwhelmed especially as the Chancellor outlined the scale of the problem that the UK economy faces in this regard. The reduction in public investment in the early years of the previous government did much to reduce the economy's productive capacity and it seems that the current government have come around to the logic of borrowing for investment a little too late in the day.
The government also set out its intention to continue with a planned reduction in corporation tax to 17%, having floated the idea of further reductions to 15% earlier in the week. This is a costly tax cut which narrows the revenue base at a time when such risk can be ill afforded. However, taken together with the corporation tax implications of a Trump presidency, the Northern Ireland Executive needs to seriously consider abandoning its plans to introduce a separate 12.5% rate for Northern Ireland. This should be done not only out of consideration for the costs involved, which have always been a been a concern, but also because the effectiveness of this policy must now be seriously in doubt.