With the Chancellor’s red box due to make its third appearance of the year on Wednesday for the Autumn Statement and Spending Review, the EY ITEM Club expects the Office for Budget Responsibility’s (OBR's) new economic and fiscal forecast to provoke little in the way of policy change. But the Chancellor is likely to take the opportunity to tackle the tax credit challenge.
OBR’s fiscal forecast is unlikely to provoke policy change in Autumn Statement, says EY
OBR forecast – tinkering around the edges
The EY ITEM Club expects the OBR to make minimal changes to its current UK GDP forecast for 2015 and 2016, of 2.4% and 2.3% respectively. However, increases in the assumptions for the working age population should encourage the OBR to be more upbeat in its medium term growth outlook.
According to EY ITEM Club’s analysis, if the OBR was to assume that the disappointing Public Sector Net Borrowing figures (PSNB) from the first half of the fiscal year are repeated in the second, it would result in the forecast for PSNB rising to around £75.5bn for 2015-16 - up from the £69.5bn it last forecast in July. However, if the medium-term growth forecast is upgraded then any lost ground should be made up over future years.
Peter Spencer, chief economic advisor to the EY ITEM Club, comments: “We’ve had two fiscal set pieces already this year so a radical re-write of the OBR’s economic forecast and borrowing projections looks highly unlikely, but there will be some tinkering around the edges.
“The OBR has been particularly downbeat about prospects for the supply side of the economy and there’s now a good case building for its UK GDP projections to be revised up slightly, particularly given the prospects for stronger growth in the workforce.
“Although borrowing is expected to overshoot this year, a more positive forecast from the OBR on economic growth over the next five years should help to make up any lost ground and still enable the Chancellor to meet his fiscal target by 2019-20.”
Possible policy changes
The envelope for total spending over the current Parliament was fixed in the July Budget, implying a £11.3bn or 3.2% real-term cut in departmental budgets from 2015-16 to 2019-20. The Spending Review on 25 November will set out how these cuts will be allocated among departments. In order to meet the Government’s commitments on overseas aid, real-terms rises in health and defence spending, and freezing education spending per pupil, EY ITEM Club says that current spending by unprotected departments will have to fall by £23.7bn or 18.8% by the end of the decade.
Stuart Wilkinson, tax partner at EY in Cambridge, comments: “The government’s goal on spending reductions is achievable, but the devil will be in the detail on how departments will deliver them.
“It will be interesting to see how the government department cuts will impact the East of England, particularly in light of the proposals for possible devolution plans for Cambridgeshire and Peterborough and potentially other counties/regions who might request this.”
Easing the burden of working age benefit cuts
Following the House of Lords vote to delay cuts in tax credits, EY ITEM Club says there are likely to be some measures announced to alleviate the effect of the working-age benefit cuts that are due to take place in April 2016.
The EY ITEM Club says the Chancellor has four possible options, including: reducing the scale of the cuts and aiming for a smaller budget surplus; reducing the level of cuts expected in 2016 -17 by spreading them more evenly over the course of the Parliament; imposing smaller welfare cuts by shifting spending back from departments to welfare; raising taxes, such as increasing fuel duty, and using the proceeds to relax the extent of the cuts.
Peter Spencer comments: “The most growth-friendly option would be to tone down the welfare cuts by exploiting the budget surpluses of £10bn and £11.6bn, which have been forecast by the OBR for 2019-20 and 2020-21. Based on July’s forecast, the Chancellor could almost cancel the entire £13bn reduction in benefit spending planned by the end of the Parliament and still meet his surplus commitment. But if the OBR revises up its borrowing forecast, the leeway available to pursue this option will be reduced.
“However, the most likely option would be to cut tax credits more gradually, spreading the pain, which would allow time for the higher living wage and income tax personal allowance to take effect.”
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