What’s on the Chancellor’s mind in five graphs

This week brings us the new government’s first autumn statement, and the first indications of how it intends to spend following the referendum. Many commentators are expecting or calling on Philip Hammond to adopt a more measured, business-like approach than the displays of political showmanship George Osborne became known for. But regardless of any political flourishes, what will be most significant is the bigger picture the chancellor paints; the statement he makes with the Statement.

So rather than speculate about what particular policies we might see on Wednesday, we’re going to look at what the chancellor will be thinking about as he sets the direction of travel for public spending in the coming years, and what that might mean for charities.

Where next for austerity?

One of the biggest questions facing Hammond will be how far he continues with Osborne’s plans for deficit reduction. The economic outlook on which those plans were based has shifted considerably since the referendum.

Growth forecast  Inflation outlook

Source: IFS                                                           Source: Bank of England

The most significant indicator is the outlook for GDP growth, which will in large part tell the chancellor how much money he’ll have to play with, and how much he might need to borrow. The IFS graph on the left shows that predictions to 2020 made by major forecasters have fallen since the referendum by 2-4%, majorly affecting expected tax revenue. Alongside the autumn statement we’ll get the OBR’s latest forecasts.

The picture for inflation (right graph) will also be worrying. The Bank of England is expecting it to overshoot its 2% target next year and continue to rise to almost 3% by 2018, with consequences for household spending power and wage growth.

How do you like your targets, softened or delayed?

Without changing course, the IFS is predicting the UK will be borrowing £25bn more a year by 2020 due to the impact of these factors on tax receipts. The chancellor has been signalling that he will step away from Osborne’s deficit reduction targets for some time to deal with this, arguing that the economy is in a ‘new phase’, although more recently he has emphasised the need to continue reducing the deficit in the long term.

Borrowing Options

Source: Resolution Foundation

So what are his borrowing options? The two most obvious ones are visible above – either delaying the target of fiscal surplus (as Osborne did repeatedly), or ‘softening’ it so that he doesn’t count investment spending when balancing the budget, letting him borrow more.

The Resolution Foundation estimates that taking the ‘softening’ option could leave the chancellor with as much as £17bn a year of ‘headroom’ – and how much of this he lets himself borrow will be one of the headline indicators for the direction of travel in the coming years.

Living up to the rhetoric

If the chancellor does decide to borrow more than planned, the next issue that will set the mood music for this Parliament is how he decides to spend it – and how closely it supports the new government’s messaging.

There are two topics likely to be dominating his attention in terms of this extra money – the first of which will be investing in measures designed to boost growth. These are likely to be targeted at specific industries, so an overall increase in public spending shouldn’t be assumed to mean the charity sector will see improved income from government.

But perhaps more attention will be focused on whether the chancellor returns to the vision set out by the prime minister at conference, of making life fairer for those ‘just about managing’ (or ‘jams’ in the new political jargon).

How is it spread?

One way of looking at whether this group will be helped is to look at the distributional impact of the changes announced, in terms of the poorest to richest households. As neatly illustrated below, the last autumn statement had an overwhelming negative impact for poorer households. One of the most prominent suggestions for meaningfully assisting this group is to lift the freeze on universal credit, and restore work allowances, which has the support of some backbench Conservatives. Any such change would be positive for the low-income beneficiaries of many charities.

Distributional impact

Source: Resolution Foundation

The regional picture

The referendum also highlighted the importance that place has had in determining people’s social mobility and life chances, and as shown below, public spending cuts have not been evenly distributed across the country. The chancellor may be looking to address imbalances through the government’s ‘industrial strategy’, further regional devolution, or the business rates system. For charities, it will be particularly interesting to understand the extent to which any such changes affect the existing challenging outlook for local authority income.

Cuts by LA area

Source: IFS

The autumn statement will be held at 12.30pm on 23 November. Follow us on Twitter for live updates, and keep an eye on the blogs for our detailed analysis of the path the chancellor sets out.

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Michael Birtwistle Michael is our senior policy officer, covering issues around charity tax and finance (including social investment) and the impact of the economy on the sector.

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