Question One: Is the UK economy slowing down? The received wisdom is that it is, and that recent indicators merely exhibit a bounce-back from the immediate after effects of the referendum. But as I have written in this column before, something significant happened in the UK economy in June and July, namely an acceleration in broad money growth. It’s still uncertain whether or not this will continue, but if it does, UK economic performance could be stronger than people think.
Six to seven per cent growth in broad money, with inflation at 0.6 per cent, suggests two things. First, that nominal GDP growth will be firm. Second, a significant proportion of that nominal growth will translate into real growth (obviously there could be a shift in the velocity of money, which could weaken some of this effect).
For those readers who lean towards the view that consensus opinion is surely correct, I would remind them of the famous letter by 364 economists to The Times in 1981, arguing that the chancellor’s Budget would deepen the recession. We now know that the recovery began soon after. It might be Groundhog Day for the UK economy.
HM Treasury, of course, is likely to remain wedded (at least partially) to its pre-referendum reports on the impact of Brexit. This means that any forecasts for the chancellor will contain underlying assumptions that: one, the UK economy will be on a glide path to slower economic growth in the long term; and, two, in the short term, uncertainty effects will exert a powerful influence.
Right now the chancellor doesn’t know whether or not these assumptions are correct or incorrect. My own view is that there’s far too much negative group-think at present. This might be wrong, very wrong.
Question Two: How do you produce forecasts when you don’t know what the Brexit strategy will be? Clearly that strategy is as yet undefined and forecasts can’t take the impact on board. However, the chancellor still needs to present an Autumn Statement with numbers in it.
Question Three: If the existing fiscal rules have been abandoned, what do you replace them with? Or are there no rules other than a slower return to surplus? It’s difficult to gauge, right now, what the market reaction to a slower return to surplus will be. It depends on precisely how big the future deficit will be and the source of the deterioration, as between the effect of slower growth and/or supply-side reform. Fiscal balance by 2019-20 may have been abandoned, but what fiscal-lite looks like remains to be seen.
Question Four: How much of a supply-side stimulus does the chancellor want to introduce to boost competitiveness in the wake of Brexit? Obvious candidates would be greater infrastructure spending and a reduction in corporation tax. Announcing a long-term plan to reduce the main rate of corporation tax to 10 per cent would be a dramatic gesture to the world that the UK is open for business. This message would have extra power in the wake of the recent EU tax ruling on Apple in Ireland. The chancellor’s options here will depend on how far he is boxed in by weaker GDP growth projections.
One final consideration and complication for the chancellor is that this will be the first Autumn Statement under a new Prime Minister. The Autumn Statement will almost certainly reflect her ideas and objectives as well.