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 2017 Economic and fiscal outlook, economy forecast adjustments included the effects of looser fiscal policy on GDP, the effects of tax policy changes on inflation and the effects of stamp duty relief for first-time-buyers on house prices.
This box considers the possible effects on the economy of the policy measures announced in this Budget and since our previous forecast in March. Further detail about each Budget measure is set out in the Treasury’s documents. Our assessment of their fiscal implications can be found in Chapter 4 and Annex A.
The Government has loosened fiscal policy materially in the near term, reflecting both net tax giveaways and a significant easing in the pace of departmental spending cuts. To estimate the effect on GDP growth we have applied the same ‘multipliers’ we have used in previous forecasts. (The shorter the period between a policy’s announcement and its subsequent implementation, the larger the multiplier.) Together, the near-term loosening boosts real GDP growth by around 0.1 percentage points in 2018 and 2019, but dampens it by a similar amount in the subsequent two years as the effects of the loosening taper off. After we had closed our economy forecast, the Treasury revised the planned path of public spending in 2018-19 and 2019-20 in a way that would have had a small effect on the profile of our GDP forecast had we been notified in time, although not sufficient to move real GDP growth rates to 1 decimal place.
We have adjusted our inflation forecast for a number of policy measures, including the traditional freeze to fuel and alcohol duties for the coming year; a new vehicle excise duty supplement for diesel cars; the reinstatement of the tobacco duty ‘escalator’ of RPI inflation plus 2 per cent (the previous escalator having expired at the end of the previous Parliament); and a freeze in the maximum tuition fee charged in England announced in September. Together, we estimate that these measures will reduce CPI inflation by a little under 0.1 percentage points in 2018-19. The Government has introduced a draft bill to cap energy prices for certain households in Great Britain. The level of the cap will be determined by the regulator and is subject to consultation, so we have not made any adjustment for that at this stage.
The Government has announced a number of measures that are likely to affect the housing market. These include a permanent stamp duty land tax relief for first-time buyers. First-time buyers purchasing a property below £500,000 will now be subject to a marginal stamp duty rate of zero per cent up to £300,000 and a rate of 5 per cent between £300,000 and £500,000 – compared to current marginal rates of 2 per cent between £125,000 and £250,000 and 5 per cent between £250,000 and £500,000. First-time buyers purchasing a property over £500,000 will not be eligible for this relief, and will therefore face the same marginal stamp duty rates on the first £500,000 as before. We expect this to increase house prices by 0.3 per cent, an estimate consistent with our published price elasticities for stamp duty changes.a Most of this effect is expected to occur in 2018.
We have made small adjustments to our forecasts of transactions and house prices for the extension to the Help to Buy equity loans scheme, on the assumption that a small proportion of the associated lending will add to total mortgage lending rather than displacing lending that would otherwise have taken place.
The Government has announced a number of policies aimed at facilitating greater housing supply, including changes to the planning system and public spending measures. In recent years, Governments have announced a number of initiatives aimed at overcoming housing supply constraints – including, for example, those set out in the 2012 National Planning Policy Framework, which included a ‘presumption in favour of sustainable development’.b Our forecast for housing supply uses a top-down approach relating housing starts to the outlook for a number of macroeconomic variables – such as interest rates and property transactions. While there has been some recovery in the pace of housing starts in recent years, it is difficult to distinguish the effect of changes in the planning system from the more general recovery in housing market activity – and housing starts remain below their pre-2008 levels. Given this, we have not made any further adjustments to our forecasts at this stage. We will keep these judgements under review as the policies are delivered and new evidence becomes available.
This box was originally published in Economic and fiscal outlook – November 2017