News in Charts: UK CSR – Real Giveaways Today, Notional Revenues Later

Wednesday’s combined Spending Review and Autumn Statement revealed that the Chancellor remains on course to meet his fiscal target by 2019/20. However, the Chancellor owes much to the Office for Budget Responsibility, which — rather fortuitously — discovered additional revenues and savings to the tune of £27 billion over the forecast horizon.

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Further analysis of Wednesday’s Autumn Statement and Spending Review reveals that nearly all of this extra wiggle room derives from higher future tax revenues and debt interest savings. But, as last week’s official public sector finance data confirmed, tax revenues can just as easily disappoint. Indeed, if the past seven months are anything to go by then there will be a net shortfall in central government receipts this fiscal year.

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Worryingly, the Chancellor has used this notional windfall to finance near-term giveaways. And, with the expected improvement in tax receipts concentrated in the middle years of this parliament, he has had to borrow more today. This is a risky game to play, with any shortfall in future growth likely to derail the Chancellor’s plans. Surprisingly, even the OBR ascribes only a 55% chance to the Chancellor meeting his fiscal target in 2019/20.

Interestingly, almost the entire deficit is now judged to be structural rather than cyclical. But that has not always been the case.

The below chart shows how forecasts for the budget balance in the current financial year have evolved since the OBR was set up in June 2010. At the time of the first Conservative / Liberal Democrat Budget, the public finances were expected to be more or less in balance by now, with a small cyclically-adjusted, or structural surplus. How times have changed. The OBR has slowly come round to Fathom’s long-standing view that much of the reduction in output during the Great Recession was permanent. Even so, its tax revenue forecasts continue to reflect what we believe to be unrealistically optimistic productivity assumptions.

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However, in our view, this focus on the minutiae misses the point. While striving to eradicate the public sector deficit with one hand, Mr Osborne has, with the other, been using fiscal policy to stimulate the housing market. Help-to-Buy 2, among myriad other schemes, has stopped the deleveraging process in its tracks, and encouraged UK households to take on yet more debt. Wednesday’s Autumn Statement offered more of the same.

Within the Autumn Statement, the Chancellor unveiled a string of new housing policies. This included doubling the housing budget, as well as a plan to build 400,000 new affordable homes by the end of the decade. Around 50% of these are planned to be ‘starter homes’ for which the government will offer a 20% discount off the market value. Others are intended to be for Share to Buy, a less well known government scheme to allow part-ownership. In his speech, the Chancellor announced that current restrictions would be relaxed, enabling more prospective buyers to meet the requirements.

But perhaps most concerning of all was yet another phase of the Help-to-Buy programme, this time targeted at properties within London. According to the Chancellor’s plans, Londoners with a 5% deposit will be able to access an interest-free loan worth up to 40% of the value of a new build home in London. This scheme, the Chancellor argued, will be funded by new rates of stamp duty on Buy-to-Let and second home purchases. The additional 3.0% stamp duty surcharge is expected to raise £880 million a year by 2020/21.

These announcements are characteristic of the Government’s approach to fiscal policy, which can be summed up with the mantra ‘public debt bad; private debt good’. In our view, the Chancellor’s pre-occupation with the public sector finances is misled.