Preparing the pitch
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Presentation at Resolution Foundation event on what to expect in the upcoming Autumn Statement.
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Preparing the pitch
- 16. • • • • • •
- 18. WHAT TO EXPECT IN THE UPCOMING AUTUMN STATEMENT Michael Saunders Senior Economic Advisor November 2023
- 19. UK economy already feeling effects of higher interest rates, with more to come 19 1 2 3 4 5 6 7 8 2001 2004 2007 2010 2013 2016 2019 2022 Interest rate on stock of mortgages Interest rate on new mortgages Interest rate on stock of loans to companies Interest rate on new loans to companies Source : Oxford Economics/Haver Analytics Gradual squeeze on households, rapid squeeze on companies % Since late-2021: - Bank Rate up 515bp - Average interest rate on stock of mortgage debt up 115bp - Average rate on stock of corporate debt up 410bp 0 5 10 15 20 25 30 35 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 Manufacturing Services Source : Oxford Economics/Haver Analytics Share of firms reporting cost of finance is major factor constraining investment %
- 20. Many moving parts in OBR forecast 20 Effect on deficit/debt in 23/24 Effect on deficit/debt later Higher inflation in 23/24 Lower Lower Higher debt service costs Small Higher Higher APF losses Higher Higher Lower growth in 2024/25 -- Higher in 24/25, neutral 5 years ahead Higher inflation forecast in later years -- Lower (but implies weaker real spending) Lower potential growth forecast -- Higher
- 21. Undesirable link between APF rundown and fiscal rules 21 Fiscal effects of APF rundown • OBR likely to revise up losses on APF gilts over 23/24-27/28 from £102bn in March to about £170bn. Losses will add about 1.2pp per year to debt ratio over that period (yellow vs red line). • Higher losses reflects higher Bank Rate path, lower gilt prices and faster APF rundown. • Total APF losses over 22/23-31/32 of 7-8% of annual GDP (£270bn). • Strong feedback from MPC action to fiscal policy is undesirable. Creates incentives for HMT to influence MPC on APF rundown. Also might make HMT reluctant to sanction future asset purchases in crises, even if justified under MPC's remit. • Better to exclude them from debt rule. • OBR likely to revise up losses on APF gilts over 23/24-27/28 from £102bn in March to about £170bn. Losses will add about 1.2pp per year to debt ratio over that period (yellow vs red line). • Higher losses reflects higher Bank Rate path, lower gilt prices and faster APF rundown. • Total APF losses over 22/23-31/32 of 7-8% of annual GDP (£270bn). • Strong feedback from MPC action to fiscal policy is undesirable. Creates incentives for HMT to influence MPC on APF rundown. Also might make HMT reluctant to sanction future asset purchases in crises, even if justified under MPC's remit. • Better to exclude them from debt rule. 82 84 86 88 90 92 94 96 98 100 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 2027-28 OBR base case excl APF losses (March 2023) OBR base case incl APF losses (March 2023) OE update including extra APF losses and faster APF rundown Source : Oxford Economics/Haver Analytics UK: Public sector net debt ratio including and excluding losses on APF gilts % of GDP
- 22. Latest fiscal rules do not ensure fiscal sustainability 22