The key point behind the Autumn Statement is that the government is anticipating a modest reduction in economic growth over the next few years, and a consequential worsening of the fiscal position. The goal of eliminating the budget deficit by 2019 -20 has been abandoned. Nevertheless a considerable reduction in the budget deficit over the next few years is anticipated.
There are modest increases (compared with what had previously been announced) in planned public expenditure over the next few years, primarily on housing, transport and research and development, but as the magnitude of the increases is less than half a percent of GDP in any one year, it can hardly be said that the Chancellor is planning a major fiscal stimulus to boost growth.
There are two major uncertainties which could derail the Chancellor’s strategy. The first is that growth may be much worse than expected over the next few years. This may not be just because of the Brexit vote, important though that is. There are major uncertainties over the world economy because of Trump’s election victory – there could be a significant move towards protectionism which would not be good for world economic activity.
The second is that the fiscal position might not improve as much as anticipated. For example, there are likely to be growing calls for extra spending on the health service, on care and on other worthy causes which may be impossible to resist; tax revenues may fall if, for example, Brexit means an outflow of financial services firms and their associated tax contribution. These are very real risks which should not be ignored. If these risks do materialise, it is not clear what can be done about them. There may be little scope for further monetary expansion, and the budgetary situation will probably mean that there will not be much room for fiscal expansion to offset a decline in economic activity. With little growth in personal disposable incomes anticipated as well, the next few years may not be too pleasant economically.