Transcript The implications for London of further welfare reform

Brexit and the Autumn Statement: Winter is
Coming
Carl Emmerson
Presentation to NCVO workshop, London
19 September 2016
© Institute for Fiscal Studies
Pre-referendum forecast: GDP per capita only
just back to pre-crisis levels
130
GDP per capita (aged 16 and over)
125
120
2008 Q1 = 100
115
110
105
100
Out-turn
95
Forecast
90
2% annual growth
Year and quarter
© Institute for Fiscal Studies
Source: Office for Budget Responsibility (2016).
2021Q1
2020Q1
2019Q1
2018Q1
2017Q1
2016Q1
2015Q1
2014Q1
2013Q1
2012Q1
2011Q1
2010Q1
2009Q1
2008Q1
85
Pre-referendum forecast: deficit reduced from
peak, but some way off being eliminated
12
Public sector net borrowing
10
Cyclically-adjusted PSNB
% of national income
8
6
4
2
0
-2
-4
Financial year
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Source: Office for Budget Responsibility (2016).
2020–21
2019–20
2018–19
2017–18
2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
2010–11
2009–10
2008–09
2007–08
2006–07
2005–06
2004–05
2003–04
2002–03
2001–02
2000–01
-6
Pre-referendum plan: considerable fiscal
tightening planned for next three years
12
Percentage of national income
Other current spend
10
3.3% of GDP (£64 billion)
tightening planned for
next three years
Debt interest
Benefits
8
Investment
6
Tax increases
4
2
0
Financial year
©
©Institute
Institutefor
forFiscal
FiscalStudies
Studies
Source:Source:
http://budgetresponsibility.org.uk/data/
Institute for Fiscal Studies.
Long run*
2020–21
2019–20
2018–19
2017–18
2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
2010–11
2009–10
2008–09
-2
Pre-referendum forecast: public sector net debt
to remain high by recent UK historical standards
300
250
Per cent of national income
200
150
Out-turn
Forecast
100
50
Financial year
© Institute for Fiscal Studies
Source: Office for Budget Responsibility (2016).
2020–21
2016–17
2012–13
2008–09
2004–05
2000–01
1996–97
1992–93
1988–89
1984–85
1980–81
1976–77
1972–73
1968–69
1964–65
1960–61
1956–57
1952–53
1948–49
1944–45
1940–41
1936–37
1932–33
1928–29
1924–25
1920–21
0
Ex-ante analysis of possible impact of Brexit on
the UK economy and public finances
• Elimination of the UK’s net financial contribution to the EU would
strengthen the public finances by about £8 billion (≈150m per week)
• But relatively small change to GDP would dominate this
– loss of 0.6% GDP wipes out £8 billion gain to public finances from
ending budget contributions
• Unfortunately nearly all forecasters suggest bigger GDP losses than
that
© Institute for Fiscal Studies
What drives economic impacts?
• In short run increased uncertainty and lower exchange rate likely
to dominate
– may lead to lower investment and consumption but may boost
exports
• Long run impacts from:
– rising trade costs, impact depending on nature of trade deal /
membership of single market
– any reduction in foreign direct investment which would reduce
productivity
• Wide variety of long run estimates
– ranging from small GDP losses to losses of 8% or more
– (best estimates suggest membership of EU had big positive impact on
GDP)
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Borrowing under different NIESR scenarios
Public sector net borrowing, % of national income
5
OBR forecast
NIESR – EEA optimistic
4
NIESR – EEA pessimistic
NIESR – WTO optimistic
NIESR – WTO pessimistic
3
2
1
£20bn to £40bn
increase in
borrowing
0
-1
2015–16
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2016–17
2017–18
Financial year
2018–19
Source: Emmerson, Johnson, Mitchell & Phillips (2016).
2019–20
Developments since the referendum: Bank of
England growth forecasts downgraded sharply
112
OBR, March 2016
110
BoE, May 2016
108
2016 Q2 = 100
BoE, August 2016
106
2½% downgrade
104
102
100
98
Year and quarter
© Institute for Fiscal Studies
Sources: Bank of England; Office for Budget Responsibility.
2021 Q1
2020 Q1
2019 Q1
2018 Q1
2017 Q1
2016 Q1
2015 Q1
96
So where now for fiscal policy?
• Sensibly the government is no longer committed to delivering an
overall budget surplus in 2019–20
– despite this target being legislated just a year ago
• But that need not mean the “end of austerity”
• Mr Hammond might in fact decide to extend austerity
– at its current pace that might get us to surplus a year or two later
• Or he might decide on something else entirely
– good economic reasons for allowing borrowing to finance investment
spending, which is an approach long-favoured by the Labour Party
– reverting to Mr Osborne’s initial, flexible, rule of a targeting the deficit
five years out
• Uncertainty over economic developments is pervasive
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Short run stimulus is possible
• Very difficult judgment given uncertainty
– would add to borrowing, but borrowing currently extremely cheap
• Only a response to short run economic cost
– if potential output reduced by Brexit in the end tighter policy needed
• Any stimulus package should be Targeted, Timely and Temporary
• Could push back the already planned fiscal tightening and/or could
announce new measures, such as
– one-off boost to public sector investment spending
– temporary cut to the main rate of VAT to encourage consumers to spend
– a time-limited tax break to encourage companies to invest
– a stamp duty holiday to stimulate housing transactions
• Versions of all these measures were implemented by Alistair Darling
in response to the financial crisis
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Conclusions
• Substantial further fiscal tightening planned as of March
• Downgrade to expected growth makes it harder to expect a surplus
by 2019–20
• In the Autumn Statement the new Chancellor will need to decide
– what level of borrowing to aim for in the longer-term, and how quickly
to try to get there: further austerity beyond 2019–20 likely
– whether to announce a temporary fiscal easing in order to boost the UK
economy
• In the context of even greater than usual uncertainty over the path of
the economy
© Institute for Fiscal Studies
Brexit and the Autumn Statement: Winter is
Coming
Carl Emmerson
Presentation to NCVO workshop, London
19 September 2016
© Institute for Fiscal Studies
Estimates of GDP effects
Study
Short run GDP change
(%)
CEP
Société Genéralé
HM Treasury
PwC/CBI
Nomura
Citi
OECD
NIESR
Deutsche Bank
Morgan Stanley
Credit Suisse
HSBC
JP Morgan
Oxford Economics
Open Europe
Mansfield
Economists for Brexit
© Institute for Fiscal Studies
–6.0
–3.6 to –6
–4.25
–4.0
–4.0
–3.3
–2.1 to – 3.5
–3.0
–2.0
–1.5
–1.25
–1.0
Long run GDP change
(%)
–1.3 to –7.9
–3.8 to –7.5
–1.2 to –3.5
–5.1
–1.8 to –7.8
–2.0
–0.3
+0.1
+1.6
Source: Emmerson, Johnson, Mitchell & Phillips (2016).
+4.0
Developments since the referendum: sharp fall in
the value of sterling
110
June 23 (referendum day) = 100
Effective exchange rate index
105
100
95
90
85
Day
© Institute for Fiscal Studies
Source: Bank of England.
01-Oct-16
01-Sep-16
01-Aug-16
01-Jul-16
01-Jun-16
01-May-16
01-Apr-16
01-Mar-16
01-Feb-16
01-Jan-16
80
Developments since the referendum: sharp
increase in measured uncertainty
-3
8
JP Morgan uncertainty index and GDP growth
6
-1
4
2
1
0
2
-2
3
4
Uncertainty (LH axis, inverted)
GDP (RH axis)
5
-6
6
-8
Year and quarter
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-4
Source: A. Monks, JP Morgan, August 2016.
GDP growth
0
85Q1
86Q1
87Q1
88Q1
90Q1
91Q1
92Q1
93Q1
95Q1
96Q1
97Q1
98Q1
00Q1
01Q1
02Q1
03Q1
05Q1
06Q1
07Q1
08Q1
10Q1
11Q1
12Q1
13Q1
15Q1
16Q1
Uncertainty index (SD from mean)
-2
Developments since the referendum: latest
independent forecasts for the economy
• In June among the forecasters surveyed by the Treasury the average
(median) forecast was for growth of
– 1.8% in 2016
– 2.1% in 2017
• In August among those who had produced a new forecast since the
referendum the average had fallen to
– 1.6% in 2016
– 0.7% in 2017
• Out of 32 forecasters
– 31 have revised down their forecast for growth over the next two years
– while just 1 (Liverpool Economics) has revised it up
© Institute for Fiscal Studies
Developments since the referendum: the
monetary policy response
• In its August 2016 meeting the Monetary Policy Committee of the
Bank of England announced that
– a cut in interest rates from their already historic low of 0.5% to 0.25%
– a new scheme to encourage low interest rates to feed into lower
borrowing costs faced by households and companies
– an extension of the programme of quantitative easing
• In addition if its forecasts proved correct then a majority of the MPC
would be in favour of a further cut to interest rates to 0.1%
© Institute for Fiscal Studies