The Autumn Statement in seven charts

As Autumn Statements go, this was both thick and thin.

Thin in terms of the number of pages in the document itself – a mere 64 of them, which makes it more of a pamphlet than a major fiscal document, about half the length of its predecessors. But in terms of the changes to the official outlook for the economy, and the government’s own plans in the coming years, today was thick with changes.

Let’s go a through of them, told through the medium of some of the most important charts of the day.

chart1-obrbreakdown

And the best place to start is with this chart, showing you just how much government borrowing is due to increase in the coming years (£122bn in total, compared with the March Budget), and where all that extra borrowing comes from. As you can see, a fair chunk of it is down to the usual stuff: extra spending commitments from the Government (the green bit), forecast changes (red) and reclassifications of where the debt sits in the national accounts (yellow).

But as you can see, by far and away the biggest chunk of the increase in the deficit each year is down to Brexit-related effects. In short, the Office for Budget Responsibility (who do these forecasts) think the economy will be weaker in the coming years. That, in turn, means less income shared across the country, which means less income tax, which means a higher deficit.

In other words, the big story from the Autumn Statement this year is less about the extra money the Government is spending and more about the ginormous fiscal impact of Brexit – a cumulative £58.6bn or more than half of the total deficit increase.

chart-2-dissecting-the-brexit-effect

Which raises the question: why does Brexit cause so much fiscal damage. The answer can be found in this next chart, which I’ve put together from some of the figures in the OBR’s documents today. In short, most of the Brexit weakness is associated with three things: lower migration, weaker productivity (itself partly a consequence of weaker investment) and a likely cyclical economic downturn caused by uncertainty and a squeeze on wages. In other words, all the stuff those economists were warning about before the referendum will mean the UK economy will be significantly weaker (2.4% over the forecast horizon) and households will be left with a major chunk of extra borrowing (£122bn) to pay off in future.

Then again, these are still forecasts, so if you’re one of those people who’s inclined not to believe them, then that’s your prerogative.

chart-3-lordknowswhathappensnext

And that brings us to this chart, which shows you just how unsure economists out there in the UK are about the potential growth rate in the coming years. As you can see, the OBR has set its own forecast somewhere in the middle, but it admits that the room for error is far greater than ever before. Indeed, it revealed today that despite imploring the Government for more detail about the likely path of the negotiations, it knows about as much as the rest of us. Which is to say not a lot.

chart-4-fiscal-rules

Still, we are where we are. And with the deficit and the national debt now much higher than before, that means the Treasury has already broken the three fiscal rules set by George Osborne to keep borrowing in check. Philip Hammond’s solution? Get another three fiscal rules. His new rules (which, as you can see from this helpful checklist from the OBR) are all being met at the moment. That’s not a surprise, since they’re so much easier than the previous ones. In fact, by some measures they’re easier to meet than those proposed by Labour Shadow Chancellor John McDonnell. Interestingly, despite this sudden fiscal lurch, markets remain relatively sanguine, and while the UK’s cost of borrowing increased a touch, it’s still well, well below recent levels. Which just about tells you how much they care about missing fiscal rules (or indeed needing them in the first place).

chart-5-wheres-the-money-being-spent

Anyway, now for the question you’re all no doubt asking: who gets all the money? Well, such as it is (this was not a big rabbit-out-of-hat moment), the vast majority of it will be spent on infrastructure: roads, railway, broadband and all that. That’s the grey-blue chunk in this next chart from the OBR. That’s leavened out by some small tax rises (stuff like an increase in insurance premium tax (again) and removal of salary sacrifice and other such loopholes) and sits alongside some smallish increases in welfare spending.

chart-6-netinvestment

But, and this is important, note that in the grand sweep of things, Government spending on investment will remain very low in the coming years. Indeed, as this long-run chart shows, public sector net investment (eg with depreciation subtracted) will still, in 2021, be lower than it was in 2010. So not as big as it looks at first.

chart-7-distributional

Finally, the Treasury did something welcome and honest in this Autumn Statement (how often can we say that?) and provided a bit of detail about winners and losers. This chart shows you which income groups will benefit and suffer most as a result of the policies both in today’s statement but also in the announcements we’ve had since last year’s election. As you can see, the wealthiest 10% of the population are by far and away the biggest losers. However, they are followed by the poorest 10% of the population, who of course will bear the brunt of the benefits freeze introduced by Mr Osborne.

And that raises one, big, unanswered question from today’s announcements: why is the Government not addressing the one policy that will cause most pain to the Just About Managing families and reconsidering this freeze? The upshot is that for many people, working and reliant on benefits to keep them financially afloat, the coming winter and spring will be very chilly indeed.

The Why, not the What. Could we Brits learn something about exit polling from the Americans?

Who voted for Brexit and why?

Did the Leave vote ultimately come down to a battle between old and young? Was it largely down to the white working class or was it a wider movement? Was it motivated by people’s dislike of EU laws, of regulation, or of free movement of the people. Or was it more broadly a protest vote?

The fact of the matter is we don’t know, and we will never know. Sure, we can get a hint of the answers from surveys produced by private pollsters both before and after, but as for understanding what was really in peoples’ heads as they went into the polling booths: forget about it.

We’ve all spent most of the past six months attempting to interpret the motivations of that single yes-no question, working out whether the leave vote meant people wanted a hard Brexit, wanted to maintain EEA membership and so on. Knowing why people voted the way they did would potentially change everything.

What, you might ask, does this have to do with the US presidential elections? The short answer is that when we come to analyse the reasons behind that result, we will be far better equipped than we are on equivalent UK elections (or referendums). And that comes down to the quality and depth of the way we conduct exit polls on either side of the Atlantic.

Broadly speaking, when we do the big exit polls on election day here in the UK we ask only one question: who did you vote for? In the US, voters are asked a whole range of things: about who they are (age group, race, gender etc), what they think were the most important issues in the election (the economy, immigration etc) and a whole load of other questions: how strongly do they favour the candidate they voted for, what are their attitudes towards trade, towards immigration, towards the role of government, towards each candidate and so on.

In other words, for decades the UK exit poll has sought to answer one question and answer it as well as possible – what’s the result? By contrast, when it comes to the US exit poll, the ultimate result is almost secondary. Instead, the exit poll (to give it its full name, the National Election Pool national survey) tries to explain why the country got the result it did.

So, first off, a tip for those of you watching our coverage over the course of our US election programme. I’ll be at our big screen running through the results as they come through, but I’ll also be doing something we don’t normally do in UK elections – exploring detailed poll data.

Unlike any of the other UK broadcasters, we will have access to the US exit poll data – so our coverage won’t just be about who has won North Carolina and Florida (to take two of the key battleground states) but why. If there is a Clinton landslide, where did her votes come from? If Trump swings things, how did he do it?

We hope to have these answers on the night itself – rather than leaving it for the following days.

This kind of thing matters. An election, or for that matter a referendum, is a blunt instrument: we get a binary answer, often distorted by unrepresentative electoral systems. Discerning from this the scale of a politician’s mandate is art rather than science. But having detailed polling data from (in the case of the US election) a hefty sample adds back a little dose of science.

As it happens, Britain used to collect details like this in its exit polls, until the disastrous poll of 1992, after which priorities, ahem, shifted. More money and time was spent on getting the result right than the background to that electoral decision – and, for what it’s worth, predicting the UK result is far more difficult than the US (more parties, more constituencies, more variables).

Anyway, it’s not as if the US polls are especially reliable; in fact, they have been plagued with problems in recent years – although that mostly came down to the fact that people were trying to rely on them to predict the result rather than explain it.

All the same, a glance at the way the Americans do things does raise a question: why don’t we spend more time on the day attempting to poll people to find out why they voted?

PS A disclaimer is probably necessary: Sky is one of the organisations that typically pays for the official UK exit poll. But decisions about scale are taken jointly together with the other members of the pool.

The dangers of the R word

Even if you weren’t following the referendum campaign closely you’ll probably remember a few of the economic highlights (lowlights?): the Vote Leave £350m bus; the “punishment Budget” and George Osborne predicting that there would be a recession if Britain left the EU.

Now we know that all three of these claims were, in their own way, wrong.

There will be no £350m a week public finances dividend (in fact the latest statistics, out today, imply the deficit this year will be even bigger than expected, before any discretionary giveaways the new Chancellor wants to add).

Even Mr Osborne ditched the idea of an emergency budget (punishment or otherwise) before he was booted out of 11 Downing Street.

And now it transpires that Britain looks like it will avoid a recession.

Now, in practice, this final point should be neither here nor there. The definition of a recession – two successive quarters of economic contraction – is, to say the least, pretty arbitrary. Other countries, most notably the US, prefer to declare recessions based on a whole range of other factors – but for some reason in Britain the convention of two quarters of contraction stuck.

So, for instance, if UK GDP shrinks by 0.1% for two quarters, that is a recession. If GDP is -0.9% one quarter and 0.1% the next, that is not a recession. Barmy – and totally misleading, since we are considerably poorer in the latter example (remember that gross domestic product is simply a measure of how much income the country is generating).

And yet, if only in public discourse, the distinction matters. People take much more notice of the R word than the threat of an “economic slowdown”. So, when, a month before the vote, the Treasury published its forecasts for the short-term impact of a Leave result the Chancellor made much of the fact that the HMT models suggested there would be a recession. The press office mocked up various placards saying the UK “would fall into RECESSION”, with the R word in a terrifying horror movie font.

This was, as I said at the time, misleading. In fact, the Treasury’s central forecast was for a 0.1% contraction for four quarters. This would, had it transpired, have been the shallowest recession in economic history. Moreover, in economics, 0.1 percentage points is essentially neither here nor there.

None of that seemed to matter to the Chancellor. He had his recession forecast and he spent the next month warning that the economy would indeed tip into it.

Roll forward to today, almost three months after the vote, and it simply doesn’t look as if the UK economy is in recession. The OECD has cut its forecast for growth next year, but has actually raised its projection for this year. And as Joe Grice, chief economist of the Office for National Statistics says, “the referendum result appears, so far, not to have had a major effect on the UK economy. So it hasn’t fallen at the first fence but longer-term effects remain to be seen.”

Indeed, whereas last month the average forecast from City economists was indeed for a recession, they now expect zero growth this quarter and next. So no recession.

forecastevolve

Now in practice, what matters is that, if you believe the economists, this is nonetheless much weaker than the 0.5% a quarter growth rate that was anticipated before the referendum. In other words, our national income is still forecast to be much weaker than previously. However, because of our fixation, because of the Treasury’s fixation with the r-word, the economic fraternity has been discredited again.

The elephant (not) in the room

At the time of the Bank of England’s interest rate decision, no-one in the room knew who was going to be Britain’s new Chancellor. This might seem like an odd thing to mention, given right now the main story people will be obsessing with is the element of shock – that the Monetary Policy Committee decided not to cut rates. But it matters. 

But before we get to that, let’s consider the decision itself, and why so many investors and economists got it wrong.

In the run-up to the Bank of England’s interest rate announcement today, investors were placing an 80% probability on the Bank’s Monetary Policy Committee cutting interest rates. Instead, not only did it leave Bank rate on hold at 0.5%, only one of its nine members voted to cut them to 0.25%.

As I tweeted this morning, the market’s apparent confidence that rates would be reduced to their lowest level in history was always misplaced – for four reasons. 

First, we don’t yet know the full impact of Brexit on the economy – and the Bank only very rarely makes big call on rates without at least checking the data or updating its forecasts. 

Second, the fall in the pound is likely to push up inflation – perhaps even beyond the Bank’s target.

Third, when Mark Carney hinted about rates being cut a couple of weeks ago, he was actually rather vague about how soon it would happen – but he mentioned August a few more times than July.

Finally, back to that point I made at the beginning: at the time it made its decision, the Bank did not know who would be Chancellor. This might seem like an odd, pedantic point, but it is significant.

It is an under-appreciated fact that these days the MPC decides interest rates the day before the official announcement. And, as I understand it, the MPC voted to hold rates yesterday afternoon, before Theresa May was appointed Prime Minister – and before she made Philip Hammond her Chancellor.

Now, on the one hand, the MPC is independent to decide rates as it sees fit. On the other hand, it cannot ignore the government entirely. For one thing, if there was to be an emergency Budget (we suspected there wasn’t but that has only been confirmed this morning), the MPC might have considered it prudent to wait and see whether the Government was planning a major splurge. There is less point, after all, in loosening monetary policy radically if fiscal policy is also going in the same direction.

Moreover, were the Bank going to do more quantitative easing, it would have needed the Chancellor’s approval. Which would have been difficult since, at the time, there was no Chancellor. George Osborne was on the way out and Hammond on the way in.

Such considerations don’t surface explicitly in the minutes – and why would they? There are enough reasons above for the Bank to pause this month rather than cutting. But it underlines the fact that these decisions are a bit more complicated, and involve a little bit more second-guessing, than you might have thought.

Anyway, the expectation now is that rates get cut next month. But will it actually happen? Probably, but these days you never know.