In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our December 2014 Economic and Fiscal Outlook, we made adjustments to property transactions and residential investment in light of reforms to stamp duty land tax
This box considers the possible effects on the economy of the policy measures announced in Autumn Statement 2014. More details of each measure are set out in the Treasury’s Autumn Statement document. Our assessment of the fiscal implications can be found in Chapter 4.
The Government has announced a number of measures taking effect between 2014-15 and 2019-20 that are expected to have a neutral fiscal impact overall, with ‘giveaways’ offsetting ‘takeaways’ over this period. Using the same multipliers that the interim OBR used in June 2010, these measures are expected to have a negligible effect on annual GDP growth and have no effect on our GDP forecast. Given the relatively small size of these measures, using larger multipliers would not change this conclusion.
The immediate reforms to stamp duty land tax announced in the Autumn Statement are likely to have significant effects on the UK housing market, complicated by the subsequent further change to rates and thresholds in Scotland that has already been announced by the Scottish Government (subject to approval by the Scottish Parliament) to take effect in April next year. The main effect is likely to be distributional – house prices and transactions will be lifted at lower prices (where the effective tax rate has been reduced) and will be depressed at higher prices (where the effective tax rate has been increased). These effects are reflected in the costing of the measure (described in Box 4.5) rather than via our economy forecast.
We have, however, increased the overall volume of property transactions by an eventual 1.1 per cent to reflect the fact that the volume-weighted effective tax rate has been reduced – i.e. that the costs associated with the vast majority of transactions will be slightly cheaper, more than offsetting the small number where they will be significantly more expensive. As property transactions contribute directly to the measure of residential investment in GDP, we have also adjusted our residential investment forecast upwards by an eventual 0.2 per cent. We assume that this affects the composition of GDP rather than the overall size of the economy, since we have not assumed that the policy change raises whole economy productivity. It is possible that the greater efficiency associated with a marginal ‘slice’ transaction tax, relative to the previous ‘slab’ structure, could positively affect productivity by increasing labour mobility. But evidence on this effect is limited and highly uncertain. For example, research by the London School of Economics in 2012 found that while higher rates of stamp duty reduce households’ propensity to move, the adverse effect was confined to short-distance and non-job related moves – an impact less likely to have direct implications for GDP.a
We have not adjusted our economy forecast in light of the further changes to the rules governing people’s access to their pension assets announced in the Autumn Statement, or our updated assessment of the effect of the changes announced in Budget 2014. But it is worth reiterating that the effects of the large financial flows that are likely to result from the changes are highly uncertain. These include flows out of pension assets for some people incentivised by the reduction in the tax charge and the removal of the effective requirement to annuitise. These could flow into other financial and real (e.g. housing) assets or immediate spending. Alternatively, there may be flows into pension assets for some people incentivised by the more flexible access to that tax-efficient saving in the future. These could reduce amounts that would have otherwise flowed into other financial and real assets, or spending if those people saved more to increase their post-tax returns from this saving. We have assumed that the effects will be offsetting. But this reflects the lack of any strong evidence to assume that one effect will be larger than the other. In reality, the effects are very unlikely to net off precisely.
The Treasury and the Bank of England have announced that the Funding for Lending Scheme will be extended for a further year and that the incentive structure of the scheme will be focused entirely on lending to SMEs. We would expect this to reduce the cost of borrowing for SMEs at the margin. Since SMEs make up a relatively small proportion of total business investment – and given the uncertainty around our forecast – we have not made a specific adjustment to the forecast for this change. But it should support the strong growth in investment we expect in 2015.