Five Autumn Statement Takeaways

A horrible squeeze, a disagreement on monetary policy & a Gordon Brown-type fiscal approach

The Big Squeeze

The OBR forecasts for income growth are simply horrific. There’s no other way to describe it. The biggest annual drop since the modern records began in 1956… followed by another fall. That would be into the third back-to-back annual household real income drop in seventy or so years and wipe out the last eight years of growth.

Even more worryingly: this isn’t a macro policy story. The impact of tax & welfare changes over the next year is only a small part of the story and the impact of rising rates is broadly neutral (some households pay more, some receive more from savings).

This is a stark picture of what a deeply negative terms of trade shock looks like.

Speaking of rates

It is hard to read the below chart - in which the OBR actually shows the U.K. falling into deflation - as anything other than a very polite way of saying “we think market expectations of the path of rate hikes are just wrong”.

That message is also consistent with the tone of MPC speeches in recent weeks.

I can’t believe that they are done - going from a 0.75% hike to stopping is too abrupt. But something closer to 4% as the terminal rate feels very possible.

And that’s great news for the public finances

The really big driver of the deteriorating public finances is rising interest costs:

Given how QE has linked a large proportion of U.K. government borrowing directly to Bank Rate there’s some upside here. Think of QE as an asset swap which switched longer dated gilts for BOE reserves remunerated at Bank Rate and this makes sense: forthe last decade that has reduced government interest expenses as Bank Rate was lower than gilt yields, but the cost has been an effective shorting of the maturity profile of government borrowing and a more direct link to Bank Rate).

If the OBR (and MPC) are right and Bank Rate will peak at a lower level… then that implies a noticeable improvement in the fiscal position from here.

Gordon is back

Well, not quite… and this will annoy everyone but… the two striking things about this fiscal consolidation are (1) how backed loaded it is and (2) the much greater reliance on taxes.

We essentially have the rhetoric of Osborne in 2010 combined with the Darling/Brown fiscal plan of 2009. And a heavy of dose of “hopefully things will get better and I won’t have to do this”.

Taxes.

If I worked for the OBR, I’d have entitled this chart “Liz Who?”. This is probably why I don’t work for the OBR.

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