This box considers the possible effects on the economy of the policy measures announced in this Spending Review and Autumn Statement. More details of each measure are set out in the Treasury’s documents. We assess their fiscal implications in Chapter 4 and Annex A.
The Government has eased the pace of fiscal tightening in the short term. It has increased spending on public services, capital investment and welfare in 2016-17, financed largely by higher borrowing and small tax increases. Beyond 2016-17 the net tax rise gets bigger while the increase in welfare spending becomes a net cut. The Government has also made a number of changes to the path of capital spending, with an increase in ‘Capital Department Expenditure Limits’ (CDELs) in 2016-17 and 2017-18, and a significant increase in CDELs in 2020-21.
In order to reflect these changes in our economic forecast, we have applied to them the same ‘multipliers’ we used in our July forecast. They imply a 0.2 percentage point boost to real GDP growth in 2016-17 and a 0.1 percentage points drag in 2017-18 and 2018-19 as the initial boost unwinds. The multipliers are assumed to diminish the further in advance any changes are announced, so differences in the fiscal path in later years, including the significant increase in CDELs in 2020-21, are assumed to have negligible effects on real GDP growth, although they do affect the composition of expenditure in the medium term. The direct effect of changes in RDEL on the GDP deflator – via the government consumption deflator – means that the effects on nominal GDP growth are more persistent. They imply a 0.3 percentage point boost to nominal growth in 2016-17; a negligible effect in 2017-18 and 2018-19; then a drag of 0.1 percentage points in 2019-20 and 0.4 percentage points in 2020-21.
The direct effect of changes to welfare spending on overall aggregate demand, including the reversal of the July tax credit cuts, is estimated by applying the relevant multiplier to the total change in spending. But these measures may also affect work incentives and therefore potential labour supply. We did not adjust our July forecast for the package of cuts announced then, as they affected both in-work and out-of-work incomes, so similarly we have not adjusted our labour supply forecasts for the reversal of those cuts. There is a risk that the net effect on labour supply of the cumulative changes announced in July and in this Autumn Statement is not neutral.
The Government has announced the introduction of an apprenticeship levy set at 0.5 per cent of employers’ gross pay bill (with an allowance of £3 million), with the resulting funds available to fund apprenticeship training. In the near term we expect the additional cost to employers to be reflected in lower nominal wages and profit margins, with the majority of the incidence assumed to fall on wages by the end of the forecast period. That implies a cumulative reduction in average earnings of around 0.3 per cent by 2020-21. The effect is partly offset by the postponement of planned increases in auto-enrolment pension contributions, which reduces employer costs slightly in 2017-18 and 2018-19.
The Government has announced a number of measures that could affect the housing market. This includes higher rates of stamp duty land tax of 3 per cent on purchases of additional properties worth over £40,000 (mainly buy-to-let and second homes). We assume that this will reduce the incentive to purchase second homes and reduce the volume of annual property transactions by around 3 per cent in 2016-17 and around 2 per cent in each subsequent year of the forecast. The Government has also announced changes to grant funding of housebuilding for shared ownership that we expect will affect the activity of housing associations. These are discussed in more detail in Annex B.
The Government has also announced a small number of policies that we expect to have an impact on inflation. We expect CPI inflation to be reduced by just under 0.1 percentage points in 2017-18 as a result of replacing the current Energy Companies Obligation (ECO) and by moving to an exemption from the costs of renewables levies for Energy Intensive Industries, but to be unchanged in other years. These policies are likely to have a similar impact on RPI inflation, which is also expected to be affected by the announced increase in council tax referendum thresholds for certain local authorities. The effect of the council tax measures is to raise RPI inflation by just under 0.1 percentage points in each year from 2016-17.