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 2013 Economic and Fiscal Outlook, we adjusted our inflation forecast to reflect changes in fuel duty.
This box considers the possible effects on the economy of policy measures announced in this Autumn Statement. More details of each measure are set out in the Treasury’s Autumn Statement document and our assessment of the fiscal implications can be found in Chapter 4.
The Government has announced a number of measures between 2013-14 and 2018-19 that are expected to have a neutral fiscal impact, 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 Government has set a spending assumption for 2018-19 that holds total spending flat in real terms and gross capital spending flat as a share of GDP. Taken together with our forecasts for other elements of spending, this implies a fall in nominal government consumption from 17.3 per cent of GDP in 2017-18 to 16.4 per cent in 2018-19. This is a relatively large change in the composition of GDP, but we assume that monetary policy determines the level of demand in the economy at this time horizon, so we have not adjusted our overall GDP growth forecast.
We have adjusted our inflation forecasts to take account of measures that directly affect the price level. The Government’s cancellation of the September 2014 fuel duty increase is estimated to reduce annual CPI inflation by around 0.1 percentage point in the subsequent year relative to the continuation of pre-announced changes. This is a permanent effect on the price level, but a temporary effect on inflation.
The Government has announced a number of measures that are designed to reduce energy bills. Firstly, the Government has amended the Energy Company Obligation, by reducing the carbon saving target, retaining the fuel poverty targets and extending the targets at these levels for a further two years. The Government has also announced funding to help offset the costs of policies on bills. These measures could have an effect on inflation and disposable incomes by reducing household bills. Final details of these measures were not available at the time our forecast was completed, so we have not made an adjustment for these policies.
A number of policies affect our forecast by boosting the housing market, both demand and supply. Most substantial is Help to Buy, which will relieve collateral constraints on prospective mortgagors via equity loans or mortgage guarantees. The equity loan part has been in place since April. By September, it had lent more than £200 million in England. Our forecast assumes nearly £4 billion of loans over the next three fiscal years. The mortgage guarantee part has been available for reservations since October, with full operation from January 2014. Its ultimate scale is uncertain. A cap of £12 billion on the Government’s contingent liability, which could have been associated with £130 billion of mortgage lending, was previously cited by Government, but this is unlikely to be used in full. For a forecast, the important variable is not total Help to Buy lending, but its additionality, which is highly uncertain given other factors, including the FLS and general pick-up in sentiment, supporting mortgage lending. To the extent that Help to Buy lending is additional, our modelling suggests it would feed through roughly one-for-one into house prices in the short term, which we would then expect to feed through to a much smaller extent into house-building – underpinning our forecast for a strong recovery in residential investment. Help to Buy is a temporary scheme, which could imply a negative effect on the housing market when it is removed. In our central forecast, we have assumed that any withdrawal can take place without disruption, as we assume the economy and financial system will have recovered further in the intervening period.
We have not adjusted our forecast for the changes to the FLS announced on 28 November, which did not have an immediate effect on bank funding costs that would be expected to feed through to mortgage rates. But we will keep this under review ahead of our next forecast.