Andrew Lilico is Executive Director and Principal of Europe Economics.
The Chancellor will present the Autumn Budget on 22nd November. Here are five ideas for things he should include.
First, with interest rates now on their way up, it’s important that the inflation targeting regime and the Government’s inflation-linked debt both reflect the very best measure of inflation available. When the current inflation target was introduced in 2003, the measure chosen was CPI. The reason CPI was chosen was as part of the then government’s preparations for joining the euro – CPI was the measure used by the ECB and hence by the central banks across Europe within the Eurozone. It was noted from the start, however, that there was a considerable drawback to the CPI measure: it excluded housing costs, which typically constituted around one fifth of household budgets. As such, the Bank of England’s policy measure excludes consideration of a large part of the economy.
In recent years the ONS has worked on creating a new measure of inflation – CPIH – that added in housing costs to the CPI. It was not ready in time for the spring Budget this year, but from March (after the Budget) the ONS started using CPIH as its official headline inflation rate and from July it was deemed officially a “national statistic”. It is thus now ready, and should start being used as the Bank of England’s target.
In combination with that change, the Government should also announce that new index-linked gilt will be indexed to the CPIH instead of the traditional RPI link that all government inflation-linked bonds have been indexed to so far. RPI has not been an official measure of inflation since 2013, and it would be useful for financial markets to have a proper inflation-adjusted benchmark, so that there would be proper price transparency over things like expected average future inflation rates (which are calculated from the difference in price between index-linked and non-index-linked bonds). The Government had a consultation on issuing CPI-linked debt in 2011 but decided against. It should do so now. In a rising interest-rate environment a proper inflation benchmark would help financial markets and make pricing more efficient.
Second, the Government should announce a serious budget for preparations for the event of no deal with the European Union. There are three key reasons for this. First, it is simple prudence to be prepared for all eventualities. Second, if we are not properly prepared for no deal we leave ourselves open to the risk of being “held to ransom” late in the negotiations by the EU announcing some last-minute “hitch” that means a deal can only be done if we part with some large extra not-previously-agreed sum of money. Third, and perhaps most importantly, the EU has thus far offered no indication that it wants or is internally capable of doing a deal at this stage.
There is no doubt that there will be trade deals and other deals of various sorts in due course post-Brexit. But political problems over issues such as Catalonia may render the EU incapable of doing a deal in time for March 2019, and its demands in respect of the ECJ having jurisdiction over five per cent of UK citizens and in respect of money are so wildly unrealistic as to be in the realm of impossibilism. The most basic reason for preparing seriously for no deal is that we may seriously have to go through it.
We may not need to start spending all of the money immediately. Philip Hammond was right, recently, to say we should not spend monies on no-deal preparations until almost the last minute no-deal programmes can be implemented. But that last minute will come before the next Budget. So we need to allocate funds in this one. How much is tricky to guess, but I would think expenditure on the scale of a lavish Olympics – some £10 to £20 billion – is about the right order to plan for for now.
Third, Hammond should announce his plans for George Osborne’s scheme to convert all the local government pension schemes into six or seven “British sovereign wealth funds”, with a particular mandate to invest in housing. The Government has unfortunately appeared rather inconsistent on housing in recent months, with Sajid Javid suggesting the Government should borrow large sums (perhaps £50 billion) to invest in housing and Hammond denying such funds were available. The British sovereign wealth funds may be the solution. Osborne held a consultation on his scheme in late 2015, but with the Brexit referendum and subsequent developments it appears to have been lost in the wind. Time to bring it back.
Fourth, the Government should announce a change in its approach to student funding. A first change would be to amend the interest rate charged on student debt, making it some more plausible benchmark than the current scheme, which at 6.1 per cent appears usurious to most commentators. Perhaps the idea is that student debt rates account for the rather high proportion of students that do not repay all their debts, but if so it is unclear why it should be for students that do pay, rather than society at large, to subsidise non-payers, given that the rates charged do not reflect any risk analysis done of individual students.
There is a case that there should also be a wider consultation on reform of student financing. It has been 20 years since the Dearing Report established the current framework. Perhaps it’s a natural time to commission another such study?
My fifth and final suggestion concerns agriculture and fisheries. The Government has confirmed that, from March 2019, the UK will be outside the Common Fisheries Policy (and hence, we must presume, outside the Common Agriculture Policy also). The agreement with the DUP requires that over this Parliament the same monies are spent on agriculture as would be spent if we had remained in the EU. But there will need to be some new financial mechanisms covering agriculture and fisheries to accompany the environmental, food management and animal welfare aspects. With time moving on, it would be appropriate for the Chancellor to offer us some indication of the Government’s thinking on the financial aspect of these matters in this Budget, so that there is time to debate and amend the new policy before Brexit.
With there having been a Budget in the Spring, this Autumn’s Budget is expected to be rather dull. I hope these five ideas might make it less so.