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 November 2011 Economic and Fiscal Outlook, we made adjustments to our forecasts of inflation and property transactions.
This box considers the potential effects on the economy of policies announced in the Autumn Statement.
The Government has announced scorecard policy measures that deliver an additional fiscal tightening of £8.3 billion in 2015-16 and £15.1 billion in 2016-17, primarily lower implied non-investment spending on public services. Falling government consumption and investment will reduce GDP growth by 0.7 percentage points in 2015, 0.4 percentage points more than we forecast in March, and by a total of 0.7 percentage points in 2016. However, at this long time horizon, we would expect looser monetary policy to fully offset the effects of a pre-announced fiscal tightening of this size, leaving our forecast for overall GDP growth unchanged as a result of this measure.
In the period up to 2014-15, the Government has announced a number of measures that have a broadly neutral fiscal impact overall and, in aggregate, they have limited impact on our economy forecast. For example, the tax credit freeze and public sector pay restraint reduce household disposable income. But delaying the increase in fuel duty will offset this, to some degree, leaving disposable income broadly unchanged overall. The aggregate net effect will also depend on differences between the marginal propensities to consume of the winners and losers, but given the sums involved the impact is likely to be very small. The Government has also announced plans to reallocate some public spending in this period, including some shifts in timing and some from current into capital spending. While higher capital investment could boost the productive potential of the economy, the effect is likely to be small. Given the overall fiscal impact of policy in these years is neutral, we have not made any explicit adjustment to our economic forecast.
The Government’s credit easing initiative is aimed at reducing the cost of borrowing for small and medium-sized enterprises (SMEs). The Government has announced two schemes: the National Loan Guarantee Scheme (NLGS) and the Business Finance Partnership (BFP). The latter is small in macroeconomic terms, so we focus on the potential effects of the NLGS.
The NLGS involves the Government guaranteeing debt issued by banks against default, as long as they pass the resulting reduction in their funding costs on to SMEs. The NLGS could reduce lending rates to SMEs by up to 100 basis points for the £20 billion of loans guaranteed. But how effective the pricing channel will be depends crucially on the robustness of the contractual obligation on banks to pass on the reduction in funding costs. The design of the contracts has not yet been determined, so it is impossible to assess this, but they are likely to operate in a similar way to those used by the European Investment Bank in its lending scheme.
A second channel through which the NLGS might affect the economy is by increasing the aggregate volume of lending. It is uncertain how much the guarantee scheme will generate additional lending, rather than merely subsidise that which would have taken place in any event. Banks might also offset higher lending to SMEs by reducing lending to other businesses and households, which would limit the economic impact of the policy.
These credit easing policies have the potential to increase lending to SMEs and so boost investment in the economy and, as we set out in Box 3.1, the lack of credit availability to SMEs is one possible explanation of the low productivity growth since the recession. However, the final design and implementation of these schemes are critical to their effectiveness. The final details are also dependent on state aid discussions with the European Commission. So, given these uncertainties, we have not adjusted our forecast at this time to reflect the impact of these policies, but we will consider them again at the time of our spring forecast when they are clearer.
The new build indemnity scheme involves the Government contributing 5 per cent of the value of a new home to an indemnity fund to assist buyers in obtaining higher loan-to-value mortgages. The scheme is limited to 100,000 mortgages and we have assumed this will translate into around 30,000 more property transactions than would otherwise have taken place over the forecast period.
The decision to delay the rise in fuel duty due in January 2012 to August 2012 and the cancellation of the rise in fuel duty in August 2012 are estimated to reduce CPI inflation by around 0.1 percentage points in 2012.
The Government has also announced the introduction of a ‘Youth Contract’. This includes a number of measures aimed at reducing youth unemployment, including wage subsidies for those aged between 18 and 24 and an expansion of work experience places and advisor support. We do not forecast unemployment by age, but, if successful, such a measure could help to reduce unemployment amongst younger age groups. We have not assumed that the Youth Contract will have any effect on the overall level of employment.
This box was originally published in Economic and fiscal outlook – November 2011