EU exit presents uncertainty but we should be more worried about the level of national debt writes Bill Jamieson
For those fretting that Brexit is our biggest problem, yesterday’s Autumn Statement brought good news and bad news.
The good news is that it isn’t. The bad news is that our biggest problem may well be worse.
Let’s not be mean about the positive elements in this Autumn Statement: £7.2 billion to support housebuilding over the coming years; £4.7 billion for science and innovation, £2.6 billion to tackle congestion and transport and £700 million for fibre broadband and 5G connections. These and other measures add up to an impressive sounding total of £23 billion over five years.
Given all this, you might well wonder why chancellor Philip Hammond was so downbeat about our prospects, citing latest OBR forecasts of a slowdown in growth from 2.1 per cent this year to just 1.4 per cent in 2017 and only a measly 1.7 per cent growth pace for 2018 and 2019.
Here in Scotland, even with the extra £800 million pledged through Barnett - it is unlikely we will see anything so vigorous: our dear Fraser of Allander Institute sees the home economy growing by just 0.9 per cent this year, slowing to a mere 0.5 per cent next and creeping ahead by just 0.7 per cent in 2018.
If you thought Philip Hammond had a problem cheering us up, how much more difficult the task now looks for Derek Mackay when he presents the Scottish draft budget on 15 December.
So why couldn’t the UK chancellor have announced more stimulus by way of tax cuts, and delivered altogether more than this watery milk of an Autumn Statement?
Here we come to the first of our problems bigger than Brexit. Despite years of hard pounding on “austerity”, the UK Treasury not only remains deeply mired in debt but that debt total is set to get worse before it gets better. The chancellor boldly declared yesterday that “we re-state our commitment to living within our means”.
Really? On the latest projections government borrowing across 2016 to 2021 is now forecast to rise by £122 billion more than forecast in the March budget. And net debt is forecast to exceed the March forecasts in every year out to 2020-21, with the debt-to-GDP ratio rising from 87.3 per cent of GDP in 2016-17 to a whopping 90.2 per cent in 2017-18.
We’re back to the Gordon Brown mantra of “borrowing to invest” - with a vengeance. Remember that previous governments signed up to a maximum Maastricht Treaty debt-to-GDP ratio of 60 per cent. Then came the financial crisis and 80 per cent of GDP was considered a temporary emergency.
Now the government is projecting a debt ratio of more than 90 per cent. Let’s pray there are no slippages. But with an economy projected to grow by just 1.4 per cent next year and 1.7 per cent in 2017 there is precious little margin of safety. Prime Minister Theresa May says she is anxious to avoid a “Brexit cliff edge”. She is already right on a cliff edge nearer home.
With that rise in debt, of course, comes higher debt servicing costs. The Debt Management Office’s net financing requirement for 2016-17 is projected to be £152.1 billion, up by £20.6 billion compared with the figure given in April. Our debt burden - and its rising interest cost every year – is the least recognised feature in media budget commentaries but is by far the biggest constraint on the function and purpose of the UK government.
Now comfort may be taken in the Chancellor’s boast yesterday that the UK this year was “the fastest growing major advanced economy in the world”. There has certainly been much to cheer after those doom-laden warnings in the aftermath of the Brexit vote: unemployment has fallen, numbers in work are close to a record high, big inward investment decisions have been announced, the economy has grown faster than most expected and retail sales figures for October showed the sharpest rise in 14 years. So much for doom and gloom.
The retort of the Remainers is that Brexit negotiations haven’t even begun, business confidence is brittle and uncertainty over long and complex talks could see a sharp fall in expansion and investment.
However, the bigger problem is the broader picture: for even if there is smooth and harmonious progress on Brexit and we remain, as many insist, within the Single Market, this does not address the bigger problem: the continuing lame performance of Europe’s economies and – as we are constantly reminded – our biggest single export market.
Growth in the euro area marked time in the third quarter at just 0.3 per cent due to the continuing slowdown in Germany. Despite much huffing and puffing by the European Central Bank which has spent billions of euros attempting to kick-start growth, the Euro zone’s post-crisis recovery is still fragile five years after the debt crisis. German GDP, the euro area’s powerhouse, slowed to just 0.2 per cent in the July-September quarter.
The 19-country bloc saw combined growth in its service and manufacturing sectors fall to 52.6 in September, a low not seen since January 2015, as measured by Markit Purchasing Managers’ Index. In Germany output plumbed to 16-month depths.
From a UK perspective, all this is troubling: tariff-free access to the Single Market will not of itself help our exporters. We need a Euro zone recovery from this woeful level of growth.
The Chancellor is right to get trade moving by addressing shortcomings in local infrastructure, though given the widespread scepticism about the benefits of infrastructure spending, his statement lacked measures that sought to improve the quality of infrastructure and address the regulatory burdens constraining housing supply.
More immediately for Holyrood will be the need for a follow-through with the Scottish budget as the spending boosts announced for the English regions will whet appetites. Andy Willox, Scottish policy convenor of the Federation of Small Businesses, lost no time in pointing out that “with one in three local roads in Scotland in an unacceptable condition, we’re looking for the Scottish government to step up.”
Of particular interest in many rural areas was the extra funding for broadband coverage. Scotland has much poorer mobile coverage than down south and UK government efforts to boost coverage through 5G, says Willox, “must deliver for firms in Stirling and Sutherland, as well as those in Shoreditch… much more needs to be done to ensure Scotland doesn’t get left behind.”
Finally, there was one announcement to be broadly welcomed: bringing forward the main Budget from the spring to the autumn of the previous year, with a window left open for an updating statement just ahead of the new tax year.
Not only will this allow more time for scrutiny of budget measures but it should also spare us the grand-standing, and politically-charged pumping up of small measures into “major new initiatives”. It was all getting too much. Vainglorious trumpeting of every micro tax adjustment is no virtue. And dullness in a finance minister is no vice. Here at least the dull Mr Hammond has proved refreshing.