maitland political autumn statement briefing - november 2016

Maitland Political Report Autumn Statement Briefing 2016 November 2016

Autumn Statement Briefing 2016

Special Report

November 2016

2

Introduction

Around the Westminster bubble, the Chancellor of the Exchequer is known as “Spreadsheet

Phil”. Before the Autumn Statement, we were expecting a more sombre affair: fewer

surprises and, frankly, less for the red top newspapers to get excited about.

In the early stages of the Statement, however we were surprised by a rather successful joke

from the Chancellor, who gestured towards George Osborne saying, “I'll be no more adept at

pulling rabbits from hats than [Boris Johnson] has been at retrieving balls from scrums".

From there, the Statement maintained much more of a technocratic approach. The PM had

lobbied the Treasury to include populist policies for struggling working families, who could be

easy pickings for the Conservatives at the next General Election. However, Hammond was

much more cautious. Modest (but popular) changes—such as the freezing of the fuel

duty (for the seventh year in a row) and the lowering of the Universal Credit taper rate—his

policies will help the so-called "Jams". Commentators have noted that his conservative

approach will calm the nerves of business and The City.

Hammond noted that he was addressing Parliament five months to the day after Britain voted

for Brexit before saying that the Office for Budget Responsibility projects economic growth

next year of 1.4% instead of the 2.2% forecast in March. The cumulative budget deficit will

grow, with just under half of the extra £122 billion that will be borrowed between now and

2021 a direct result of the referendum outcome.

This was an Autumn Statement in which Hammond made increasing productivity a central

focus. His speech contained a number of measures designed to tackle the productivity gap,

including the creation of a new investment fund and the publication of a Northern

Powerhouse strategy. Some in the media are commenting that Hammond’s intervention

marks the end of Osbornite austerity and a return to Gordon Brown's “investment in

infrastructure” strategy.

Perhaps the most radical decision was that this would be his last Autumn Statement; it will be

replaced by a policy-focused Autumn Budget and a Spring Statement concerned mainly with

the latest economic forecasts. In terms of the market reaction the FTSE had started the

morning on the front foot ahead of the Autumn Statement. Following Hammond’s speech, it


Special Report

November 2016

3

fell by more than 20 points at one stage, but closed broadly flat at 6,817 yesterday before

opening slightly lower this morning.

In this report we outline some of the key policy areas and financial statistics from yesterday’s

fiscal event. If you would like further information please follow us on Twitter @MaitlandPol or

email us: [email protected]

Industrial Strategy

The Chancellor’s painful rollcall of countries with higher rates of productivity set out the stark

reality of the changes that will be needed if Britain is to make a success of Brexit.

Perhaps the most important policy tool for achieving the much needed improvements in

efficiency and output is the long awaited Industrial Strategy. Theresa May’s speech to the

CBI this week promised a publication before the end of the year, and the Autumn Statement

confirmed that it is “forthcoming”.

The Strategy will “set out the broader framework for government and business to work

together to address key economic challenges such as building the skills base the economy

needs and turning great ideas into commercial success.” The Autumn Statement has laid the

groundwork for this with commitments to additional spending.

A key measure announced was the newly established National Productivity Investment Fund.

This will plough £2bn annually into Research & Development. The government is pinning its

hopes on R&D to drive forward economic growth; they want to ensure that the next

generation of discoveries is not only made and developed in Britain, but produced here as

well.

Brexit

If anyone tuned into the Autumn Statement to get an insight into the government's plan for

Brexit, they will have been sorely disappointed.

In his first fiscal event since the UK voted to leave the EU, the Chancellor said that his goal

was to “prepare our economy to be resilient as we exit the EU” and to get the economy


Special Report

November 2016

4

“match fit” for the next chapter, noting that the Brexit vote made it “more urgent than ever” to

tackle long-term economic weaknesses in the economy. The OBR was clear that the

referendum decision means that it has reduced potential output growth over the forecast

period by 2.4 percentage points compared to where it would have been without a Brexit vote.

These gloomy forecasts mean that borrowing will rise to fill the gap.

The OBR assumes that new trading arrangements will slow import and export growth for ten

years and that migration will be restricted. But despite this continuing uncertainty around

Brexit and the UK’s future relationship with its European neighbours, the Chancellor’s

Statement gave little indication of the Government’s intentions. He did not elaborate on the

Government’s EU negotiating strategy, nor its preferred relationship with the Single Market.

So while we were given details on the price of Brexit, we were left waiting for a sense of the

Government’s direction of travel.

Highlights of The statement

• OBR cuts UK growth forecasts for 2017 and 2018

• Growth forecast for 2016 is 2.1 per cent and 2017 is 1.4 per cent

• Public sector net borrowing for 2020/21, is now forecast to be £20.7bn

• Infrastructure gets boost from £23bn productivity fund

• More funding for affordable housing

Government spending

The Brexit vote has brought a cloud of uncertainty over the British economy, deterring

investment and resulting in a downgrading of growth forecasts. As a result borrowing will

need to increase, further burdening the public finances and throwing into doubt the alleged

dividend from leaving the EU. The Guardian’s Aditya Chakrabortty said: ‘Two big things have

been revealed this afternoon that will shape all of our lives for years to come Austerity was

originally meant to be over within a single parliament of five years. It will now last for up to 15

years’. Whilst the Institute of Directors summed it up as “This was sensible and sober

[Autumn Statement], but businesses would have liked to see more investment boosting

measures.”


Special Report

November 2016

5

Key measures:

• Public spending as a proportion of GDP has fallen to 40% from 45% in 2010.

• Departmental spending limits will remain in place. From 2021-22 they will rise with

inflation

• The exception is the Ministry of Justice which will get extra funding for another 2,500

prison officers.

Taxation

Although the Chancellor made some popular decisions on taxation, such as the raising of the

personal allowance and freezing of fuel duty, some people will see his approach as a move

away from fiscal prudence. John O'Connell, Chief Executive of the TaxPayers' Alliance said

“The Chancellor’s decision to slow the pace of deficit reduction means that we will run into

two decades of living beyond our means, which is a frightening prospect

Key measures:

• Corporation tax will be reduced to 17% by 2020as planned

• Business rates will be reduced by £6.7 billion over the next 5 years

• New rules will be introduced that limit the tax deductions that large groups can claim

for their UK interest expenses from April 2017

• The Government will legislate to restrict the amount of profit that can be offset by

carried forward losses to 50% from April 2017

Employment

The Chancellor was at pains to point out that the labour market remains robust despite the

predicted slowdown in growth. The government’s strong record on employment has been

one of its trump cards in the face of criticism over their austerity policies, and they will hope

the investments announced yesterday will see this continue. In terms of policy, Hammond

emulated his predecessor by confirming increases to the National Living Wage and Minimum

Wage.


Special Report

November 2016

6

Key measures:

• The National Living Wage will rise to £7.50 from April 2017, “a pay rise worth over

£500 a year to a full-time worker.”

• The government will invest an additional £4.3 million per year to strengthen NMW

enforcement. This will fund new HM Revenue and Customs teams to proactively

review those employers considered most at risk of non-complianc

• Employee and employer National Insurance thresholds will be aligned at £157 per

week by April 2017

• The tax and employer National Insurance advantages of salary sacrifice schemes will

be removed from April 2017

Infrastructure

Fast and reliable digital links for business were cemented with the Government’s explicit

support for driving the country’s digital infrastructure forward. Fiona Krasniqui, Digital

Spokesperson for the British Chamber of Commerce stated. We hope the 100% business

rates relief for new full-fibre infrastructure will encourage better business connections,

because the current reliance on old copper lines hold too many businesses back. The UK is

still some way behind delivering access to a world-class digital infrastructure to businesses in

all parts of the country.

Key measures:

• The UK will be a “world-leader in 5G". More than £1bn will be invested in digital

infrastructure. From April there will be 100% business rates relief on investment in

new fibre optics.

• Hammond says he has written to the National Infrastructure Commission asking for

proposals for spending in the next decade. The government will commit to spending

between 1% and 1.2% of GDP from 2020 on economic infrastructure. Currently

spending is 0.8%.

• City regions will get new borrowing powers.


Special Report

November 2016

7

Productivity and Investment

Terry Scuoler, CEO of the Manufacturers Organisation, stated he felt the Autumn Statement

went some way to taking control of business nerves around a Brexit strategy (or lack

thereof). He commented: “Business was looking for reassurance from the Chancellor at a

time of considerable uncertainty he is walking a fiscal tightrope but his pragmatic statement

provides enough stimulus in key areas vital to improving productivity, whilst holding back

some fiscal firepower if, as the OBR suggests, the economy stutters…”

Key measures:

• The Government will prioritise additional high-value investment in infrastructure and

innovation that will directly contribute to raising Britain’s productivity.

• The productivity gap for the UK is “shocking” and means it lags behind Germany,

France and Italy Hammond said.

• Announced the creation of a new National Productivity Investment Fund worth £23bn

over the next five years.

• The Government will invest an additional £2bn in R&D, with Hammond extolling the

benefits of economically productive infrastructure for businesses and families.

• Chancellor will take a step towards the problem of UK start-ups being snapped up by

larger competitors by investing £400m with a view to unlocking £1bn of investment.

Transport

One of the ways the Chancellor has sought to address productivity was through addressing

new transport links as well as adapting and improving existing ones. Stephen Joseph, CEO

of Campaign for Better Transport said, "while the Government has rightly committed to

focusing on smaller local projects which can deliver better value, it is still wasting too much

on big road building schemes… what's needed instead is more support for alternatives to

driving including rail and bus infrastructure.


Special Report

November 2016

8

Key measures

• An additional £1.1 billion spending on local travel networks in England; roads on rail,

roads, electric vehicles and autonomous vehicles are expected - more

announcements to be made by Chris Grayling, Transport Secretary next week

• £22m will be invested to address traffic pinch points, with £450m to trial digital signals

on railway lines.

• £390m to build on work on low emission vehicles and connected autonomous

vehicles.

• To fund commitments made in the Autumn Statement, Insurance Premium Tax will

rise from 10% to 12% in June 2017

Housing

The Chancellor made housing one of his key themes. Lord Porter, Chairman of the Local

Government Association echoed the views of many: “It is positive that the Chancellor has

recognised our calls for the Government to invest in the building of new affordable homes to

rent and buy and in infrastructure that is linked to housing growth. If we are to stand any

chance of solving our housing crisis, the Government’s forthcoming housing strategy must

hand councils the powers and funding to resume their historic role as a major builder of

affordable homes."

Key measures

• Creation of £3bn House Building Fund

• The Communities Secretary would bring forward a White Paper in due course to take

further steps

• New £2.3bn Housing Infrastructure Fund for infrastructure for up to 100,000 new

homes in high demand areas

• London will get £3.15bn for 90,000 affordable homes. And the adult education budget

will be devolved to London.


Special Report

November 2016

9

Competition and consumers

Another key theme of the statement was innovating to help business and competition. David

Riches, Executive Director of British Chamber of Commerce remarked, “we welcome the

announcement of additional finance and insurance support by UK Export Finance, which

should provide valuable help to UK exporters. However, this is not sufficient to improve our

ambition to get more businesses to export – and increased direct support such as enabling

businesses to attend trade missions, trade fairs, commission market research or make

themselves export ready would have been an important additional boost to companies.”

• The government will encourage private investment with £400 million from the British

Business Bank to unlock £1 billion of new investment in innovative firms planning to

scale up, and a doubling of capacity to support exporters through UK Export Finance.

• The government will bring forward a green paper in Spring 2017 that will closely

examine markets which are not working fairly for consumers.

Patient capital

Adam Marshall from the British Chamber of Commerce he commented, “Philip Hammond

has delivered a responsible, solid and focused package that will reassure both business and

markets…For years we have highlighted the difficulties that fast-growing businesses have in

getting access to patient capital for expansion, so we welcome the Treasury initiating a

review of patient capital. Solutions to this long-standing problem will be critical to growing the

business champions of the future.”

Key measures:

• HM Treasury will lead a review to identify barriers to access to long-term finance for

growing firms, supported by an advisory panel led by Sir Damon Buffini.

Maitland 125 Shaftesbury Avenue, London, WC2H 8AD www.maitland.co.uk T: +44 (0)20 73795151

maitland political autumn statement briefing - november 2016

Documents