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George Osborne Is Gone, But Osbornomics Is Not Forgotten: Reaction To Autumn Statement 2016

24/11/2016 16:17

Philip Hammond's most interesting announcement was the Autumn Statement will be his last as well as his first - the Budget will switch to spring from autumn, and spring will see only a fiscal and economic update rather than any policy changes. This is a well-crafted effort by Hammond to present himself, in contrast to his predecessor George Osborne, as a more sober, sombre and cautious Chancellor of the Exchequer - just the kind of finance minister Britain needs in this period of turmoil. In reality, however, Hammond is doing a very good impression of Osborne on the substance of fiscal policy.

Hammond has tweaked Osborne's fiscal rules to give himself a little more room for manoeuvre given the expected economic impact of Brexit. As such, he is promising now to achieve budget surplus at some point in the next parliament - rather similar to John McDonnell's promise, despite the Conservatives' persistent demonisation of Labour statecraft. McDonnell's promise is itself rather similar to Ed Balls' promise, despite Labour's persistent demonisation of New Labour.

Osborne's rules were of course always rather flexible, since he was simply able to postpone the date at which they would be met. The illusory idea that fiscal policy should be governed by rules remains firmly in place, and Hammond's success in cornering Labour into valorising fiscal discipline, even under a leader elected (twice) on a radical anti-austerity platform, is one indebted to the Osborne playbook. Austerity is no longer in vogue, but austerity politics is here to stay.

Hammond's statement essentially confirms what Osborne was always reluctant to admit: that Britain's economy remains profoundly dependent on public debt. Public debt is set to rise enormously under Hammond's stewardship (by £122 billion above Osborne's final forcecast, over the next five years). Crucially, this borrowing is not being used to fund new investments in infrastructure and Britain's productive capacity which might at last have put our economy on a path towards sustainable recovery.

There will be some new funds for public investment in R&D, but rather meagre funds compared to those being borrowed simply to maintain the levels of general public expenditure that Osborne had committed to, as tax revenues have been revised down. As a result, the Office for Budget Responsibility is expecting productivity grow to decelerate, despite Hammond's interventions. This problem cannot be disentangled from Brexit, but the main, immediate cause will be lower-than-anticipated business investment. The Conservatives' persistent failure to reorient private investment towards the long term shows few signs of being abated.

Public debt is of course not a bad thing - it is a necessary and normal part of macroeconomic management, and vital to industrial policy. But Hammond follows Osborne in presenting it as a bad thing, despite creating lots more of it. This explains Hammonds rejection of Theresa May's suggestion that the government should issue Infrastructure Bonds. And it helps to explain why one of the most significant announcements in today's Autumn Statement - the granting of new borrowing powers to metro mayors - feels punitive rather than empowering for local government. The powers will only be granted to the new mayoral offices if strict constraints are agreed with the Treasury in advance - and the detailed document accompanying the statement in parliament also contains an intriguing reference to the possibility that local authorities may in future be able to borrow directly from the Treasury (at a cost higher than the Treasury itself borrows from the private sector).

Falling productivity growth is one of the reasons that earnings growth in Britain remains so sluggish. Hammond aped Osborne is seeking to present himself as the champion of low-earners by accelerating the increase in the so-called national living wage (NLW). But utility of the NLW in boosting household incomes is starting to level off, a trend that would only be mitigated by a much more significant and immediate rise, towards, say, the real living wage as calculated by the Living Wage Foundation. The NLW increase is of course very unlikely to keep pace with the cost of living rises resulting from the depreciation of sterling triggered by the Brexit vote (which will disproportionately affect poorer groups who spend more of their income on food).

Hammond has also stuck with Osborne's plan of increasing the personal income tax allowance, presenting it (as per usual) as a policy which will benefit the poorest groups, when it will almost exclusively benefit middle- and high-earners. An increase in higher rate tax threshold and the regressive insurance premium tax (both of which Osborne initiated) will compound this effect.

It is worth noting finally that as dire as today's economic forecasts are for the government, things could be about to get a whole lot worse. Crucially, the OBR has effectively factored a 'soft Brexit' into its assumptions - and indeed a quick Brexit. Its forecasts are based on the expectation that immigration, imports and exports will all fall in the next five years - just not by very much. The OBR is expecting some form of agreement on free movement of goods and workers between Britain and the EU to be put in place within two years of Article 50 being triggered in March, that is, the point at which Britain will formally leave the EU.

This might be where we end up (I have indeed predicted as much!) but there is at least some possibility, to say the least, that we might not. Moreover, it is worth pointing out that, at this moment in time, soft Brexit is not actually government policy. Several members of the cabinet are continuing to make the case for hard Brexit, and while May continues to procrastinate, it seems the OBR is getting ahead of itself. Yet, as I document in Austerity Politics and UK Economic Policy, the OBR is no stranger to fixing assumptions that, one way or another, end up favouring the Chancellor of the day - just ask George Osborne.

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