Autumn Statement: the case for prudence

By John Hawksworth

This Thursday should see the most upbeat Autumn Statement the Chancellor has yet delivered. Public borrowing is on course to undershoot, but rather than contemplate big giveaways, the Chancellor should bank all or most of it.

Economic recovery is gathering pace, with UK growth this year expected to be around 1.4pc, as compared to an official forecast of just 0.6pc at the time of the Budget in March. Stronger growth is boosting tax revenues, while government spending appears to be growing broadly in line with plan.

As a consequence, the Office for Budget Responsibility (OBR) is likely to revise down its official forecast of public borrowing (excluding special factors) for 2013/14 by around £10-15bn.

This would take the projected annual budget deficit down from around £120bn at the time of the Budget in March to around £105-110bn in the OBR’s new forecast on Thursday. That is still a pretty big fiscal gap, equivalent to around 6.5-6.8pc of national income, but it would be the first time since George Osborne took over as Chancellor that borrowing has come in much lower than expected.

More importantly, this borrowing undershoot should persist in future years as the recovery continues. In other words, it looks like a structural improvement not just a temporary cyclical blip.

Back in March, the OBR projected that the annual budget deficit would still be around £42bn in 2017/18, but it now looks as though this estimate could be revised down to around £20-30bn.

That would be within touching distance of the Chancellor's new objective to eliminate the budget deficit altogether by 2020. He could, for example, achieve this target by holding total current spending constant in real terms for two more years until 2019/20.

This assumes that the Chancellor banks all or most of any borrowing undershoot, rather than using it to cut taxes or spend more now. That would be the prudent thing to do given that the UK economic recovery is still at a relatively early stage, the situation in the Eurozone remains fragile and we are probably still looking at a budget deficit this year of over £100 billion.

But the case for fiscal prudence will need to be balanced against concerns about the rising cost of living and the consequent decline in average real wages, which are set to fall in 2013 for a record fifth year in succession.

Recent hikes in energy prices have further increased the pressure on the Chancellor to address this issue in the Autumn Statement, but he needs to do so in a way that does not scare away the investment needed to keep the lights on in the longer term.

The government is expected to remove from household bills the cost of the energy company obligation (ECO), which is a legal requirement for suppliers to provide energy efficient measures.  Introduced in January, this flat-rate levy is added to consumer bills and the government estimates that it costs customers around £50 a year on average.  

Energy minister Ed Davey has ruled out scrapping the ECO, but the estimated total cost of the scheme of around £1.3bn might instead be met from a small part of the borrowing undershoot.

As usual we are likely to see a complex mix of giveaways and takeaways in the Autumn Statement. But overall, prudence is likely to largely win the day, with net giveaways of only around £1-2bn that are modest compared to likely downward revisions in the overall public borrowing numbers of £10-15bn.

For businesses, our hope – and what we hear consistently from companies large and small - is for as much stability as possible.   A clear path for the future, rather than piecemeal changes, has the best chance of improving confidence and in turn business investment – which is the key to a sustainable economic recovery in the longer term.

John Hawksworth:
Read profile | Contact by email | Tel: 020 7213 1650