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The £220 billion cost of Brexit

There is one significant tax rise in the Autumn Statement - and for a government led by a PM who prides herself on being plain speaking, some would see it as a bit sneaky.

It's a two percentage point rise in insurance premium tax, which will raise £840 million a year very fast.

And that will be paid by everyone who buys insurance, which is most of us.

Also the rise in the national debt compared with expectations at the time of the March budget is much more than most expected: by the end of parliament, the Office for Budget Responsibility (OBR) forecasts government debt at £1.945 trillion, up from £1.725 trillion.

That is an increase in the cash level of debt of an eye-watering £220 billion (to use an adjective favoured by the Chancellor, Philip Hammond).

Now £78 billion of that is due to the expected post-referendum slowdown in the economy, £16 billion is from government spending and tax decisions, and most of the rest is the result of measures taken by the Bank of England in August to avert recession (its initiatives to help banks lend and to purchase bonds).

The increase in national debt is the financial cost of Brexit. Credit: PA

So it's reasonable to characterise that £220 billion increase in the national debt as the financial cost of Brexit.

And it is the worsening in the public finances which prevents cautious Hammond from going spending bonkers, to offset a downturn in expected growth to just 1.4% next year (compared with March's forecast of 2.2%).

That said, Hammond has taken steps to stimulate the economy: this was a modestly "expansionary" Autumn Statement.

Most of the net increase in his spending comes from the kind of measures normally associated with Labour governments - namely biggish investments in housing, transport, telecoms and research and development.

In aggregate, these investments will cost the taxpayer just under £4 billion in 2018/19, a bit less than £5 billion in 2019/20 and over £5 billion the following year.

What's more in 2021/22 the Chancellor has pledged a step change in infrastructure spending to between 1% and 1.2% of GDP or our national income, up from 0.8% - and this is scored by the Treasury as worth £7 billion per annum then.

Now one way of seeing this rise in government spending on infrastructure is as an insurance policy against the clear and present danger of a sharp long-term fall in investment in Britain by the multinationals that dominate our economy (lower investment that reflects their pessimism about the consequences of the expected reduction in our access to the European Union's single market).

Of course the OBR expects business investment to be weaker almost immediately, by 6.3 percentage points next year.

And it is also anticipating a deceleration of 1 percentage point in household spending in 2017 and 2018 - largely as a result of a squeeze on wages that stems from a rise in inflation (and to repeat what you know, that inflation rise is the delayed impact of the post-referendum slump in the pound).

Brexit is set to make each of us 1.7% poorer. Credit: PA

What else is notable about today's announcements?

Well many will seize on the OBR's statement that its forecasts are predicated on the assumption that net inward migration will not fall to the government's desired "tens of thousands".

Or to put it another way, its forecasts for growth would be quite a lot lower if it believed Theresa May could actually deliver that target.

Second, it expects Brexit to lead to slower growth of imports and exports for the next ten years.

Now in the round its assumptions about the effect of leaving the EU on business investment and net migration (a fall, but as I said, not to tens of thousands per annum) is to reduce potential output growth by 2.4 percentage points relative to where it would otherwise have been, and 1.7 percentage points per head.

Or to put it another way, Brexit is set to make each of us on average 1.7% poorer than would otherwise have been the case over five years.

And as I mentioned a few days ago, perhaps the most important way of seeing the blow to our prosperity from Brexit is the impact on productivity or output per hour worked, which in March was predicted by the OBR to grow at a respectable 2% by 2019 but is now expected to increase by just 1.6% then.

This productivity shock is another way of explaining the Chancellor's priority, his allocation of almost all spare cash to infrastructure and improving the UK's productive potential.

As for the promised help for those on low incomes who are 'just about managing', the JAMs, that's trivial: the change in universal credit to allow them to keep 2 pence in the pound more of any extra earnings they derive from work will cost just £295 million next year and a peak of £445 million.

And you might notice that is a fraction of what the Chancellor is taking from us in that insurance premium rise.

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