Autumn Budget 2017: An IEA Briefing

Abstract

The Chancellor should resist calls to ramp up spending and focus instead on reducing the burden of tax and regulation. The economy has weathered the initial shock of Brexit much better than most had expected. Unemployment has continued to fall and inflation should peak soon, easing the pressure on real incomes. There is no need for a fiscal boost. What’s more, the public finances remain in poor shape. There is room for some small increases in spending on priority areas, partly funded by savings on contributions to the EU. Even on current plans, it will be at least a quarter of a century since the government last balanced the books. This Budget will have to consider more pessimistic assumptions about future productivity, made by the Office for Budget Responsibility. As it happens, the OBR may be chucking in the towel just as productivity is about to recover. But if the OBR is right, an extended period of lower growth will reduce the fiscal wiggle room. The Chancellor should ignore the temptation to address intergenerational inequality with tax breaks for younger people or a temporary cut in stamp duty for first-time buyers. Instead, the playing field should be levelled by tackling underlying problems that mainly affect the young, including the lack of housing supply, and by withdrawing subsidies which mainly benefit the elderly regardless of need. The Chancellor should resist calls to boost productivity with a splurge of public investment. Rather, he should focus on measures that free up the economy without spending enormous amounts of other people’s money, such as liberalising planning laws to facilitate housebuilding and devolving more fiscal powers to the regions. While there may be little margin for additional tax cuts, he should announce a fundamental review of taxes on property – including stamp duty – with the aim of dramatically simplifying the system. On Brexit, the Chancellor should emphasise the opportunities rather than just dwell on the risks. These opportunities include the scope to reduce trade barriers with the rest of the world and review regulations at home.