Hello readers, welcome back to my blog on the interesting economics news stories of the week. Last week I discussed if it makes sense economically to renovate Buckingham Palace and whether or not using taxpayer’s money to fund the palace was justifiable, especially when the country has so many other pressing issues to deal with. This week I will be focusing on the recent announcement of the Autumn Statement, which was revealed by the Chancellor of the Exchequer, Philip Hammond, on the 23rd of November. In today’s post, I hope to be able to extract the complex economics information from the autumn statement and explain it to you in a simplified manner, as well as summarize and evaluate the key points that came out of this. If you have the time, please do give my take on this story a quick read, and hopefully, it will become much clearer. As always if you have any questions, you can post them below and I will try to respond to them. Alternatively, you can send them directly to my personal email address: firstname.lastname@example.org
Over the last few months in Britain, there has been this dark cloud of uncertainty looming over our heads, mainly down to the fact that we don’t exactly know how Brexit is going to affect the UK in terms of trade, business, and investment. The question of whether we are heading towards more of a ‘hard’ Brexit or ‘soft’ Brexit and whether we would have access to the single market, still remains unanswered. The chancellor’s statement which although does not explicitly reveal any hints as to what type of Brexit we might see, or how Brexit will impact the UK, it does provide some sense of clarity and reassurance in terms of the government’s plans for spending, and what it proposes to do for the economy over the next 5 years.
Before we get going, what even is the Autumn Statement?
According to the BBC, The Autumn Statement is the second of the two most important economic statements that the chancellor gives every year, the first being the Budget. The chancellor updates MPs on the government’s taxation and spending plans, based on the economic projections provided by the Office for Budget Responsibility (OBR) – a body set up in 2010 to provide independent economic forecasts.
What were the main announcements?
This year, it was revealed that a new government investment program has been devised and this will mean £23 billion of government spending on Infrastructure, Construction and Innovation projects. This additional borrowing of £23 billion is spread over the next five years and aims to raise UK productivity (output per worker per hour), transform the growth potential of our economy, as well as improve the quality of people’s live. According to the chancellor, the UK’s productivity gap is “shocking” as the country lags behind the US and Germany by 30% and behind France by 20% as well as Italy by 8% and thus borrowing was needed to stimulate the economy.
A few of the proposed projects:
- Upgrade the road links between Oxford and Cambridge and accelerate the delivery of the railway, which will link Oxford and Cambridge.
- £4.7bn on science and innovation including £2bn a year more for research and development by 2020-21
- A £2.3bn Housing Infrastructure Fund to deliver infrastructure for up to 100,000 new homes in areas of high demand.
- £1.4bn to deliver 40,000 additional affordable homes
- £2.6bn on transport networks including £220m to address traffic pinch points, £450m on digital signaling and £390m on low emission vehicles
- £1bn in digital infrastructure including £700m on rolling out full-fibre connections and supporting 5G trials
- £250m to the Northern Ireland Executive, £400m to the Welsh government and £800m to the Scottish government.
Although it seems at the outset that ploughing £23bn into a new national productivity investment fund is impressive, we must remember that the HS2 high-speed railway, funded separately, is due to cost £56bn at the last count. This shows that in comparison, the money being spent here is not actually that much. Furthermore, the £23bn will be spent over five years, so an average of £4.6bn a year. Even more so, the spending is weighted towards the later years; in the first year, 2017-18, the figure is just £2.4bn.
According to the Independent, the small print of the OBR’s (Office for budget responsibility) forecast document, casts doubt on the full delivery of Chancellor’s vaunted £23bn capital spending boost. They expect the Government to underspend its new ambitious capital infrastructure budget by almost £15bn over the five years to 2021-22. The forecast is likely to be an embarrassment for the Chancellor, Philip Hammond since it is equivalent to almost two-thirds of the additional £23bn infrastructure spending he announced in the Autumn Statement.
With regards to housing, the treasury hopes that new measures such as building more affordable housing will help to improve the affordability of housing and rent, especially for those on low incomes. The chancellor is also expected to outline a ban on letting agents fees-a move which would help around 4.3 million households in private rental housing.
We must also remember that the price elasticity of supply (PES) for housing is relatively inelastic in the short run. This is down to the fact that construction companies cannot suddenly plan, and then build thousands of new homes in areas when there is an increase in demand. There are also a number of planning regulations and other constraints on new housing developments – where local authorities may restrict the building of new property in accordance with their local housing plans. Furthermore, there is a time delay in construction projects meaning that the supply of newly built properties is limited.
A fuel duty is essentially a tax that is imposed on the sale of fuel. It remains the biggest component of the price of diesel and petrol, and motorists also pay 20% VAT on those fuels. The autumn statement revealed that a rise in this fuel duty was cancelled, for the seventh year in a row, costing the government 850 million and saving the average car driver £130 and van driver £350 a year. This means fuel duty has been held at 57.9p per litre since the 2011 budget. Mr. Hammond also pledged £390m in the low emission vehicle industry.
You may read this and think, excellent! The government has finally realized that we simply cannot afford to just keep paying more taxes, especially when incomes are not rising at the same rate. However, you should also remember that this will cost the government £850 million meaning that other sectors such as education, housing, healthcare and social welfare may experience cuts as the money has to come from somewhere else in order to fund this. Some may argue, particularly environmentalists, that we should increase the fuel duty as oil is a fossil fuel and has a number of negative externalities associated with it. Thus by reducing this tax the government is essentially failing to acknowledge the damaging effects of these externalities. Also since the demand for fuel is relatively inelastic due to there being few suitable substitutes available, the government could, in theory, get away by increasing the fuel duty as in the short run people will still buy fuel for their cars. In the long run, people may even switch to electric cars or vehicles powered by hydrogen and this would allow the UK to meet its CO2 targets and help contribute to the global 2oC target.
A few other factors announced:
- An extra 2,500 prison officers will be recruited during 2016/17, a 15% increase in the existing 18,00 officers which will cost £104 million. This will tackle “unacceptable” levels of violence in jails. Extra officers will be paid out of new government funds. 400 of these staff will go to the 10 “most challenging jails”
- Promise to abolish Autumn Statement. Philip Hammond, the new chancellor has scrapped the Autumn Statement. “No other major economy makes hundreds of tax changes twice a year and neither should we. So, the spring budget in a few months will be the final spring budget.”
- The Economist
- The Guardian
- The Independent