As we say goodbye to the summer and usher in the autumn, there seems to be change in the air.
Since the referendum, our concerns over the short-term outlook for the UK economy have faded somewhat. Political uncertainty has diminished, while the Bank of England (BoE) has already delivered the vast majority of what we expected to see from it by year-end.
Focus now shifts to the government’s Autumn Statement. New Chancellor Philip Hammond has already said that the UK can 'reset' budget policy if necessary, and has abandoned the previous objective of balancing the budget by 2020.
So how much stimulus is likely?
The BoE is buying £60bn of extra gilts, which is roughly 3% of GDP, while a weaker economy could lead to the government deficit widening by around 1% of GDP. This means if the government thought it could increase spending up to the additional purchases from the BoE, it could have up to 2% of GDP to play with.
To achieve this kind of fiscal stimulus, the Chancellor has a number of options:
- A VAT cut – this would be easy to implement, and could give a short-term boost to the consumer. 2% of GDP roughly equates to VAT being cut to 17.5% for 2 years. The downside to this option is that households might just save the benefit of the tax cut.
- A corporation tax cut – before he stood down, George Osborne talked about cutting corporation tax to 15%. However, it is already set to fall from the current 20% to 17% by 2020, so this would only be a small additional stimulus.
- Other tax cuts – A stamp duty holiday or cuts for first-time buyers are possible, although politically this could be difficult if it is seen to be helping higher earners.
- Get busy building – Typically the economy gets a greater boost per pound from direct spending by the government than from tax cuts. Additional investment could include infrastructure projects, R&D programmes, and increased housing construction. This could be better for the UK from a longer-term perspective, although the impact might be slow to come through into real activity.
All in all, it looks to us like a significant government tax cut or spending stimulus is on the cards. As we await further details from the Chancellor, the outlook for the UK appears to be a bit rosier, a bit like the colour of autumn leaves.
You can find a more detailed discussion on the topic in our Macro Matters publication, Maybenomics - the Bank (of England) and budget boost