The 2008 financial crisis highlighted the imbalanced nature of the economy. Now, finally, it seems we are truly starting to address that. A long overdue shift is underway from the the short-term thinking that has driven economic policy for far too long towards a longer-term strategy.
One key aspect of this is the international agenda and that will unfold in coming years. It includes a commitment to free trade and a likely clean Brexit. But time will tell. The other aspect is the domestic agenda, in which this Autumn Statement plays a key role alongside the new industrial strategy.
The Chancellor’s speech highlighted some of the major challenges. He signalled out the budget deficit as well as low wages, low investment and low productivity. The latter, he reminded us, was reflected in the huge gap in productivity between London and other major cities.
The solution requires long-term thinking: boosting investment, infrastructure and innovation. To his credit, the Chancellor stressed this.
The focus on the supply side at the centre of the Autumn Statement was also welcome. It is about creating an enabling environment, so positioning the UK for the fourth industrial revolution. The main positive was the new National Productivity Investment Fund which is set to invest £23 billion over the next five years in transport, digital, research and development, and housing. The latter probably deserves a category by itself.
The UK’s high value investment is very low by international standards. If we are to be a high growth, value added economy, we need even more public driven investment. This needs to be alongside innovative private sector schemes that attract more long-term savings into long-term investment. The focus on regional policy and productivity enhancing measures is good, although it will take time to be delivered.
It is not just the supply side. We need to boost demand. The statement’s commitment to increase the living wage and to boost future incomes for those on low to middle incomes will help acheive those goals.
What about the economic growth numbers? Since the EU Referendum, the economy has been resilient and has avoided the financial armageddon that was widely predicted. This statement confirmed that the Treasury’s pre-referendum forecasts were badly wrong. Unfortunately some of their pessimistic thinking is still there in the Autumn Statement’s longer-term assessment of Brexit.
That being said, the independent Office for Budget Responsibility has produced a credible set of economic forecasts for the next couple of years. The OBR has increased slightly their forecast for growth for this year to 2.1% while lowering it for 2017 to 1.4% and 2018 to 1.7%. This slowdown is due to uncertainty that dampens investment and the impact of a temporary squeeze on peoples’ income through higher inflation from a weaker pound. Despite this, they still show employment continuing to rise in coming years.
The fiscal numbers remain poor. Tax revenues continue to disappoint. One worry is that despite economic growth this year being higher than the Treasury expected at the time of the March Budget, tax revenues have been less than expected. In turn, the debt numbers remain high. This points to continued pressure on government spending in coming years. In turn this triggers the danger of pro-cyclical thinking. Low growth boosts the budget deficit and ties the Chancellor’s hands to do more.
In that respect, either the economic forecasts are too low or the fiscal stimulus is not enough. Overall, this was a good Statement. The message is the UK needs to invest in order to achieve strong, sustainable growth.
Gerard Lyons is Chief Economic Advisor to Policy Exchange.