In the Autumn Statement Mr Hammond announced a net fiscal easing of £5.7bn for 2018-19, as higher spending on infrastructure and research and development via the £23bn national productivity investment fund offsets a rise in insurance premium tax and yet another clampdown on tax-dodging. This, however, is equivalent to only 0.3 per cent of GDP, which is only a small policy change.
With fiscal policy not doing much to boost the economy, it follows that monetary policy will remain loose. Futures markets are now pricing in a three month interbank rate of only 0.8 per cent as late as December 2018, which is only a 0.4 percentage point rise from current levels. With sterling’s fall likely to add to inflation, this implies that savers face more years of negative real returns on cash.
Mr Hammond has therefore done little to ease their plight. He has retreated only slightly from George Osborne’s policy of “fiscal conservatism but monetary activism”. "This is still a situation of fiscal consolidation, just a bit less than during the Osborne years", says Ian Kernohan, an economist at Royal London Asset Management.
Despite this, government debt will grow faster than the OBR previously expected. It now expects public sector net debt to be £1.94 trillion in 2019-20. That’s £220bn more than it predicted in March.
One reason for this is that growth isn’t generating as much tax revenue as previously thought, in part because rising numbers of self-employed people aren’t paying much tax.
A much bigger reason, though, is simply the economy will be weaker than expected as a result of the Brexit vote, and this means lower tax revenues. "Brexit means lower growth and sharply higher borrowing," says ING's James Knightley. The OBR cut its forecast for growth next year from 2.2 to 1.4 per cent, and cut its 2018 forecast from 2.1 to 1.7 per cent. And it doesn’t expect these losses to be recouped through faster growth thereafter.
One reason for the downgrade is the OBR expects sterling’s fall to do more damage to consumer spending - by raising prices - than it does good to exports by making them more competitive: export volumes simply aren’t very sensitive to exchange rate changes.
Also, the OBR warned “we expect continuing uncertainty following the EU referendum to depress business investment”. It now expects this to fall slightly next year, whereas it expected a 6.1 per cent rise in March. In making great play of increasing government investment, Mr Hammond underplayed the fact the private sector won't be investing much.
Luckily, though, high government debt is not a pressing economic problem at least for now. Negative real interest rates mean that government debt will shrink relative to GDP unless we suffer a severe recession or if government borrows a lot more than expected. The simple maths of debt sustainability tells us this. This tells us that with real gilt yields at minus 1.5 per cent and trend growth of 2 per cent (the OBR’s assumption), any primary budget balance better than a deficit of 3.1 per cent of GDP would be consistent with the debt-GDP ratio falling over the long-run. The OBR, however, envisages much smaller deficits than this – and indeed, a surplus by 2019-20. It’s for this reason that Mr Hammond was able to forecast significant falls in the debt-GDP ratio by 2020.
In this sense, the constraint upon the government’s ability to borrow is much less economic than it is political: the desire to avoid the embarrassment of appearing “imprudent” probably prevented Mr Hammond from announcing a greater fiscal easing. For savers, however, this political constraint comes at a price.
