The five-year fiscal plan will be the centrepiece of Wednesday’s budget announcement. Here’s how the autumn statement and autumn budget will be delivered next Autumn.
First, all the £12bn earmarked for capital spending in 2019/20 and 2020/21 will be poured into cash-strapped council coffers in 2019, and the money will be used to pay for pothole repairs, cleaning up urban waterways and expanding social care services. But it will provide little of the appetite for council chiefs to cancel capex announced in the 2016 budget. This year’s spending will be spent on urban regeneration and on upgrading rail and road infrastructure.
Then there is the autumn statement, where the chancellor will set out the government’s debt trajectory and progress towards meeting “debt at sustainable levels”, as indicated in the economic and fiscal outlook in November 2017. This will include a revised plan for general government net debt to peak at 38% of GDP in 2022-23. This is smaller than that anticipated in the August 2017 financial outlook, as the government has kept to its target of capping net debt at no more than 80% of GDP.
Then comes the autumn budget, and the five-year fiscal plan. More detail on this is expected to emerge in the budget, but the consensus view is that £8bn will be allocated for investment in affordable housing as the government in this plan will have retained the stamp duty exemption on purchases under £300,000.
Economic forecasts show tax receipts rising across the future, although it is not clear how the government will find the money to finance these increases.
This means the budget agenda will have a tighter focus on the public finances. As the budget details emerge, the chancellor will be under pressure to deliver increases in productivity and create a climate for private sector investment. As growth improves, tax receipts should rise, so tax revenues will remain on a sustainable path. Interest on public debt is, however, set to rise in line with the path of official forecasts.
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We are no longer in the peak years of the quadrupling of GDP in the wake of the financial crisis. Since then, the economy has rebounded with a renewed vigour, but this increase in output has come at a cost, particularly as households have deleveraged by building up debt to take advantage of the recovery.
The squeeze on households from low wage growth and surging house prices is beginning to bite. Their ability to service their debt is limited. As incomes stagnate and rises in mortgage payments outpace wage growth, households and their savers are beginning to question the value of higher debt. This is part of the long-term rationale behind the budget addressing income inequality and student debt.
Before the spending cuts of 2010 became a structural feature of public spending, the UK was among the most indebted nations in the developed world. The government has been balancing the books through reducing public sector deficit, but with £500bn of public sector debt on the public books, policymakers recognise that government does not have unlimited credit card limits.
A tightening of fiscal policy has been necessitated by coming years of strong economic growth. With the extra £8bn of investment and the transitional tax increase, the chancellor will now be attempting to balance the books while giving households a measure of support to help them get through the post-referendum squeeze.
If the narrative is of “clear economic recovery”, then our headline to watch will be the public finances. There are still risks to the economic outlook but, on balance, a more robust recovery implies a brighter fiscal outlook.
• Neil Lawson is director of economic liberalisation at the Institute of Directors