In anticipation of the Chancellor’s Autumn Statement, Newgate has asked a panel of experts what they hope to hear from Philip Hammond.
Dr. Colin Lawrence
Head of Strategy & Research, Parker Fitzgerald
The Chancellor had previously signalled that there will be a loosening of fiscal policy in order to build infrastructure, raise productivity and rebalance the economy. But this priority has shifted radically over the weekend towards tactical measures to address income inequality.
Philip Hammond is likely to adopt a fiscal policy with marginal changes targeted towards JAMS – “just about managing” households. He could find now, however, that his options are severely limited by a negative outlook and the prospect of ongoing uncertainty and risk to the UK economy as Brexit negotiations begin – and he will be bracing himself for tough figures from the OBR on public finances and growth. Further this week is the first week we are hearing a strong unified European voice that will “punish the UK to serve EU interests” reiterating the PMs own stance that “Brexit means Brexit.” The statements of the Danish PM, Italian PM and the German Treasurer suggest a very tough stance on the UK. Indeed the EU are claiming that the UK will have to meet its fiscal obligations, many years after it leaves the EU.
Any strategic fiscal policy will have to account for a high probability that the £60 billion HMRC revenues will be dramatically reduced with London losing its status as the global financial centre. A hard-line EU stance rejecting concessions on any of the four pillars of the EU, will likely imply that the UK is likely to have negotiate brand new agreements under the WTO on a bilateral basis. Given tariff impositions in the range of 15% to 25%, this will certainly devalue the pound further and create higher inflationary expectations as well as curb economic growth. A further risk premium will be imposed on sovereign debt given the uncertainty of negotiating a new international trade structure. Higher yields will blunt any further monetary easing.
The Chancellor will, therefore, need to find a fiscal framework meeting short term tactical needs that support PM May’s call for a stronger mixed economy. He will attempt to tiptoe around huge infrastructure projects that can drive economic growth but risk driving up debt/GDP ratios and downgrades by the IMF. He will need some reserve to provide room for manoeuvre to cope with the uncertainty and potential economic shocks that lie ahead. The Chancellor has few other options to fall back on – monetary policy may have run its course as a vehicle for stimulating the economy. Low interest rates and quantitative easing have boosted asset values and share prices, but such policies will have little incremental impact moving forward and indeed rates will likely rise due to shifting inflationary expectations from further sterling weakness.
The Chancellor needs to find a long term approach that can deliver sustainable economic growth while maintaining sound public finances during a time of great upheaval – a considerable challenge indeed!
Dr. Colin Lawrence oversees the firm’s Strategy and Research practice and is the Chairman of Parker Fitzgerald’s Global Regulatory Network.
A recognised expert in all areas of financial risk management, Colin has more than 30 years experience in financial services and strategy consulting. From 2008 to 2013 Colin was the Director of the Risk Specialist Division at the Prudential Regulatory Authority (PRA), and senior adviser to the Deputy Governor of the Bank of England on a number of systemic issues.