The U.K.’s ‘Autumn Statement’ — what‘s new and what it means for the economy
Britain’s Chancellor of the Exchequer Philip Hammond delivered his “Autumn Statement” to parliament on Wednesday. The update on the government’s tax and spending plans was the first since the U.K.’s Brexit vote in June to leave the European Union.
Here, Financial News looks at the key Autumn Statement takeaways and what the City thinks of them.
Philip Hammond’s loosening of the fiscal purse strings in his Autumn Statement, including a boost for infrastructure investment and encouragement for venture capital to back growing U.K. firms, have been welcomed by the City. But in the words of one economist: “There isn’t really enough money being spent here to solve long-term problems.”
The economy and fiscal strategy
The Chancellor opened the statement by saying the IMF predicts the U.K. will be the fastest growing major economy in the world this year, but said: “Our task now is to prepare our economy to be resilient as we leave the EU.”
He said the Office for Budget Responsibility, the government’s independent forecaster, thinks U.K. growth will be 2.1% in 2016, higher than forecast in March. In 2017, it will slow to 1.4% on lower investment and consumer demand driven by uncertainty and higher inflation.
Lucy O’Carroll, chief economist at Aberdeen Asset Management, said: “Make no mistake, this is no fiscal reset and no end to austerity. You can see that in the fact that departmental spending will continue to be squeezed in line with the plans set out by the Chancellor’s predecessor back in March.
“He has clearly tried to make productivity a focus … this Autumn Statement is a move in the right direction, but there isn’t really enough money being spent here to solve these long-term problems — hardly surprising, perhaps, when there is so much uncertainty around Brexit.”
Hammond also confirmed he is ditching [his predecessor] George Osborne’s flagship policy of returning to a budget surplus within this parliament. Instead he will borrow to finance spending on the country’s productive capacity.
The establishment of a £23 billion ($28.5 billion) National Productivity Investment Fund, to be spent on housing, research and development, and economic infrastructure including transport and fibre-optics, was described by Hammond as the “centerpiece” of his new willingness to invest in the country.
“The Chancellor’s infrastructure plan is upside down.”
But some institutional investors complained there was little mention of a role for the private sector. Vivek Paul, a director of client solutions at BlackRock, said: “Today’s announcements do not result in the immediate provision of new assets other than gilts, as the borrowing to fund the new investments will be done on the government’s own balance sheet.”
And Christopher Mahon, director of asset allocation research at Barings, said: “The Chancellor’s infrastructure plan is upside down. The Treasury has already committed eye watering sums of money to programs such as HS2, Heathrow & Hinkley that won’t be completed for another 20 years … meanwhile only token amounts of money are being spent on practical projects that are needed today, such as easing rail and road bottlenecks.”
The Investment Association, the U.K.’s trade body for fund managers, was more positive. Chris Cummings, its chief executive, said the IA “supports the increased focus on infrastructure” and, separately, offered its backing to the creation of a new Municipal Bonds Agency in the U.K., which is aiming to raise finance for local authorities from capital markets.
Hammond also promised to extend the U.K. Guarantees Scheme, which offers government backing to private investment in infrastructure projects, until 2026. Introduced in 2012 with a £40 billion target, the scheme has faced criticism for only having issued nine guarantees to date covering £4 billion’s worth of projects.
Osborne had already extended the scheme from its original end-date of 2016 to at least 2021.
Private equity and venture capital
The U.K. government has pledged a £400 million commitment to venture capital funds in a bid to support business.
The Treasury will lead a review — led by an advisory panel chaired by former Permira chief executive Sir Damon Buffini — to identify barriers for growing firms to access long-term finance.
The £400 million that will be invested by the U.K. Business Bank is meant to unlock £1 billion of new investment in innovative firms planning to scale up, the Chancellor said.
Meanwhile, the increase in the national living wage to £7.50 from £7.20 from next April is also likely to impact private equity firms with U.K. investments — increasing the cost of labor.
There was a sigh of relief from the pensions industry at a lack of major changes to this area — one of Osborne’s favoured targets for tinkering. Indeed, Hammond specifically excluded pension savings from his closing of a tax loophole known as “salary sacrifice”, meaning the practice will continue to be allowed for pensions.
Other tax changes were less welcome. There was a big cut in the amounts that people can contribute to a pension after they have already begun drawing upon it after the age of 55, from £10,000 a year to £4,000.
Richard Parkin, head of pensions policy at Fidelity International, said the change would “really bite” and added: “This feels like a significant blow to the government’s policy of freedom and choice [in pensions] and we urge them to think again.”
The Chancellor also confirmed changes to the tax deductibility of debt that are expected to have a substantial impact on private equity firms — or more specifically, upon the businesses they own, and therefore on the way private equity firms structure investments.
Hammond also said that in order to “support investment in the U.K.’s burgeoning financial technology sector, the Department for International Trade will provide £500,000 a year to specialists in this field.”
He also said the government had commissioned an annual “State of U.K. Fintech” report and would launch a network of regional “fintech envoys.”
It has also agreed with the Joint Money Laundering Steering Group — made up of the leading U.K. Trade Associations in the financial services industry that they will modernize their guidance on electronic ID verification to support the use of technology to access financial services.
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And for the latest on Brexit’s impact on the U.K. economy, see Financial News: Brexit, which covers the fallout from the U.K.’s vote to leave the European Union.