Making a statement
My advice to the Chancellor Andrew Sentance
In turbulent economic times, the Autumn Statement by the Chancellor of the Exchequer assumes a greater degree of significance. We have had 40 years of parliamentary economic statements at this time of year. Five of them carry echoes of the current situation.
An autumn economic forecast was first laid before Parliament by Denis Healey in 1976, when he was grappling with the IMF crisis. This evolved into the Autumn Statement, which became a much more comprehensive statement of government economic policy in 1982. That was when the Autumn Statement was delivered for the first time in its current form by Geoffrey Howe in the depths of the early 1980s recession.
Nigel Lawson presented his 1987 Autumn Statement two weeks after the stock market crash in the autumn of that year; and Norman Lamont’s 1992 Autumn Statement aimed to stabilise the UK economy in the aftermath of sterling’s departure from the ERM. In the autumn of 2008, Alistair Darling delivered his autumn “Pre-Budget Report” in the darkest days of the global financial crisis.
So Philip Hammond becomes the sixth Chancellor in the past 40 years to deliver a major autumn policy statement when his government’s policies are being challenged by traumatic political and economic events.
The Chancellor faces a choice. Does he emphasise short-term measures to support the economy? Or does he lay the ground for a coherent long-term economic strategy as the UK prepares for its future outside the EU?
I hope the Chancellor chooses to focus on the long-term – and if he does, he may be able to help the economy in the short-term, too. Business confidence and investment will be supported if the Chancellor is able to present a sound and coherent view of the Government’s strategy for managing Brexit.
So if the 2016 Autumn Statement is focused on long-term economic strategy – what should it look like? In my view, Mr Hammond should focus on major policy initiatives in five main areas: housing; transport infrastructure; smaller businesses; tax reform, and skills and education. How bold and radical he is in these areas should be the basis on which we judge the Chancellor’s Autumn Statement next week.
The housing market has been an issue for the UK economy for many decades. There may be some scope for more public investment through housing associations. But we can’t rely on the Government to deliver the solution to the UK’s housing problems without more support from the private sector.
That can be achieved in two main ways. The Government can support the release of more land for housing development – including making available the very large holdings of land and buildings held by central and local government. Excluding housing, the current value of land, buildings and infrastructure in the UK is around £2 trillion – about half of which is owned by the public sector and half by private sector businesses. The private sector has a good economic incentive to use its holdings of land and buildings effectively, but that is not so true in the public sector – which could release more land for housing and business development, alongside a relaxation of planning rules to allow more housebuilding.
The second priority on the housing front should be shifting the taxation of housing and property towards a more rational economic model. Recent government policy has been to raise stamp duty, but this is not an economically efficient way of taxing housing, as it discourages housing transactions. Stamp duty rates also cut in at very low levels – hitting first-time buyers. A better approach would be to shift the balance of tax towards property values – for example through a reform of council tax – and use the proceeds to lift lower value property transactions out of the stamp duty net.
Transport infrastructure has been a major area of focus in recent government announcements – giving support for a new Heathrow runway and announcing the route for HS2. But there is still scope for making a big difference to local communities and regional development with smaller schemes – road and rail developments which will connect by-passed towns and cities much more effectively to the core of the UK economy. We also now need to have policies that are more supportive of small and medium-sized enterprises. A post-Brexit world could affect the ability of the UK to attract big overseas investments which relied on our full membership of the EU. Smaller companies have not benefited as much as larger businesses from cuts in the corporation tax rate – and they are more affected by other business taxes which add to costs like national insurance and business rates.
George Osborne focused very strongly on cuts to the headline corporation tax rate affecting large businesses; Mr Hammond should be trying to ease the burden of other taxes, which hit smaller businesses.
At the same time, both small and large businesses could benefit if the Chancellor sets out some clear principles for tax reform in the future – simplifying tax structures and shifting to a model where we have lower tax rates to compensate for a withdrawal of complex tax reliefs and allowances.
Finally, Mr Hammond should make sure that he is continuing to fund and support the vitally needed expansion of vocational and technical education and training in the UK. The development of new apprenticeships has been very welcome, and this gives school-leavers more options to enhance their skills without undertaking a full university degree. But the UK needs to shift its skills/education model closer to Germany and the Scandinavian countries, where vocational and technical education is more strongly supported, and young people can enter the world of work while continuing in education and training.
All of this will need to be managed while keeping public finances in good order – so it will be a difficult balancing act for Mr Hammond. But if I can offer one further piece of advice to the new Chancellor it is this – keep it short! In 1987, in the wake of the stock market crash, Nigel Lawson’s Autumn Statement lasted about 20 minutes. Last year, George Osborne’s lasted over an hour.
A clear and succinct summary of the Government’s economic priorities is better than a long, vague and ambiguous one. Let’s hope we get the former rather than the latter on Wednesday!
‘Stamp duty is not an economically efficient way of taxing housing, as it discourages transactions’