Chancellor defiantly sticks with austerity

Schroders’ Senior European Economist, Azad Zangana, comments on the UK  Autumn Statement and Spending Review

“Still bruised from his recent defeat on tax credits reforms, Chancellor George Osborne, delivered a lively and defiant Autumn Statement, focusing on departmental spending budgets, with a strong theme of safeguarding security spending in light of recent events, and providing more housing initiatives.

From a macroeconomic perspective, little has changed since the post-election July Budget statement. The Office for Budgetary Responsibility (OBR) forecasts 2.4% growth in 2015 (unchanged) and 2016 (+0.1 percentage points), rising to 2.5% in 2017 (+0.1 ppts), before slowing to 2.4% in 2018 (unchanged) and to 2.3% in 2019 and 2020 (-0.1 ppts in both years).

In terms of the impact of austerity, the change in cyclically adjusted net borrowing (also known as the fiscal impulse) suggests a slightly smaller impact on the economy in 2016/17, but a greater impact in 2017/18. Overall, fiscal tightening will average 1% of GDP over the next three years before easing, but over the full five-year forecast horizon, the degree of fiscal tightening projected has been increased from 4.6% to 5% of GDP.

Despite the defeat on tax credits reforms, the slightly stronger growth forecast, lower interest payments and earlier implementation of some spending cuts have meant that the government is still expected to achieve a budget surplus of close to £10 billion in 2019/2020 – providing the government more room for manoeuvre in later years than expected. Debt as a share of GDP is falling each fiscal year in the OBR’s forecast thanks to nominal growth outpacing public borrowing. Public debt is forecast to fall from 82.5% in 2015/16 to 71.3% in 2020/21.

The details of the Spending Review was always going to be painful reading for most government departments, although some did surprisingly get away unscathed. Health and international aid continue to enjoy their protected status, but due to recent security concerns following the Paris attacks, the Chancellor decided to increase the allowance for defence, and also not to cut police budgets further.

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