As the protected departments making up over 75% of public spending, the axe fell heavily on other departments. For example: Transport -37%, Energy -22%, Culture Media & Sport -22%m Business -17%, DEFRA -15%. It is worth mentioning that some of the resources were shifted to investment areas, which allows the Chancellor to meet his fiscal rules on current expenditure, but at the same time increase capital spending.
Finally, a raft of additional housing measures was announced, including a doubling of the housing construction budget with a goal of building 400,000 new homes by 2020. Many of these homes will be offered to under-40s with a discount, with additional help offered to Londoners with low deposits.
While the government’s efforts to build more homes should be welcomed, the impact will be marginal at best. The lack of new supply will remain severe which should continue to push prices higher, putting homeownership out of the reach of many more people.
Interestingly, the government is beginning to recognise the negative impact on the economy from the lack of homes, including the unproductive use of homes, such as those with second properties and by foreign investors. As a result, a new additional 3% stamp duty levy will apply to those purchasing second and subsequent homes, along with for those seeking to invest to let properties.
Compared to our forecast, the OBR appears optimistic on GDP growth. We forecast growth to slow to below 2% in 2016 due to the negative impact from the tighter fiscal policy. If we are correct, the slower than expected growth should result in a shortfall in tax revenues, as well as an increase in welfare spending, making the Chancellor’s austerity plans less effective in reducing the budget deficit.
Moreover, the Bank of England may struggle to raise interest rates against a backdrop of sub-trend GDP growth. We do expect the Bank to start the hiking process in 2016, but it may be forced to pause before reaching its neutral rate, which we estimate to be around 2.5%.”