Philip Hammond kept the nation in suspense as to the new government’s priorities for the economy until the Autumn Statement, and generally it was worth the wait.
The chancellor proved a bigger spender, focusing on one of the fundamental challenges facing the UK economy beyond Brexit – productivity.
If the UK is to forge a prosperous future post-Brexit, it is not only new trade alliances that it will need to master. UK productivity is below all other G7 economies bar Japan, and with the exception of Italy, the UK has seen the slowest improvement in productivity among the G7 since the Great Recession. The overall commitment of £23bn over five years to the new National Productivity Investment Fund and the additional measures announced yesterday to help improve UK productivity are therefore encouraging.
Our own composite indicator, the Variables for Sustained Growth (VSG) index, which tracks productivity potential in 21 areas, shows UK performance is particularly poor in transport and telecommunication infrastructure compared to its G7 peers.
So it is welcome that the chancellor promised more investment in local transport networks, which can improve much needed inter and intra-regional connectivity, and more investment in digital communications, helping to better integrate parts of the UK economy, as well as making our centres of growth more competitive.
He also announced an increase in government funding for research and development, and more money to support a further push towards regional devolution.
One of the key challenges to improve productivity among the different UK regions is mobility, where housing plays an important role. Hammond set out plans to accelerate new housing supply, including affordable housing, though previous tax changes continue to contribute to the freezing of large parts of the market, stifling inter-regional mobility.
Pity there was not more focus on education, however. If the government intends to make the UK less reliant on non-UK workers after Brexit, the skills of the home-grown workforce will need to improve.
The chancellor’s focus was on supporting the UK economy through investments in its medium to longer term future. But there will be other areas affecting productivity where, at least initially, the UK will fare worse: reduced trade, lower FDI levels, and deteriorating public finances are among the headwinds expected to hit UK productivity performance. Not much he can do there at this stage.
In the short term, the results of the EU referendum have added some challenges and it is important to consider what the UK economy needs following the Brexit vote.
Clients often tell me that two of the things they value most are stability and continuity, and when that fails, to at least have sufficient foresight in order to plan ahead. The chancellor yesterday confirmed earlier commitments to reduce corporation tax and increase income tax thresholds, while also outlining his new “fiscal rules” to guide future levels of spending, providing some clarity and stability in what is overall a challenging period.
Significant uncertainty will remain in the short to mid term, which is expected to dent economic growth, and Hammond’s plans allow for a fiscal boost to help alleviate the pain somewhat.
With the Bank of England left with only a few rounds of unconventional remedies at its disposal, and the chancellor constrained to some degree in the level of debt he can credibly pursue, it is probably wise to keep some spare headroom for later.