Britain’s economy is set to take a hit of almost £60 billion over the coming five years as a result of the referendum vote to leave the European Union, MPs have been told.
The Office for Budget Responsibility slashed growth forecasts and predicted higher than previously expected borrowing, forcing Chancellor Philip Hammond to confirm he was abandoning predecessor George Osborne’s plan to achieve a budget surplus by the end of the decade.
Setting out tax and spending plans in his first Autumn Statement, Mr Hammond said he was striving to ensure the economy was “match fit” for the “new chapter” ahead, unveiling a series of plans aimed at boosting productivity and helping low-income workers.
But the OBR said the Government could be expected to borrow £122bn more over the five years to 2020/21 than it predicted at the time of the Budget in March - three months before the Brexit vote. And it said that some £58.7bn of this was directly attributable to the referendum result and the cost of leaving the EU.
Of this, some £16bn would be caused by lower immigration, said the OBR - though it added the figure, largely caused by the loss of taxes which migrants would otherwise pay to the Treasury, would be even higher if the Government achieved its ambition of reducing net migration to the tens of thousands. However, its calculations did not include any gains from ceasing contributions to the EU’s Budget, currently running at around £13bn a year.
Overall, the OBR predicted that potential economic growth over the five-year period would be 2.4 percentage points lower than if the UK had voted to Remain in the EU. It downgraded growth for next year from the 2.2% predicted in March to just 1.4% and for 2018 from 2.1% to 1.7%.
Mr Hammond said the slowdown was due to “lower investment and weaker consumer demand, driven, respectively, by greater uncertainty and by higher inflation resulting from sterling depreciation”.
Shadow Chancellor John McDonnell said the Autumn Statement placed on record the “abject failure of the last six years”.
In a statement largely free of the headline-grabbing surprise announcements deployed by Mr Osborne and Gordon Brown, Mr Hammond confirmed a freeze in fuel duty, a rise in the National Living Wage and measures to ease cuts to Universal Credit.
He also said he was consigning the Autumn Statement to the history books, with the main Budget moving from the spring to the autumn in future.
In an illustration of how sharply the public finances have deteriorated since March, the OBR forecast that rather than the £10.4bn surplus Mr Osborne had been hoping to achieve in 2019/20, the UK will still have a deficit of £20.7bn at the end of a decade of austerity.
The national debt will breach the symbolically important 90% of GDP mark in 2017-18, the Chancellor told MPs.
Mr Hammond set out new fiscal rules which will require him to balance the books “as early as possible in the next Parliament”, to get the structural deficit below 2% and debt falling as a share of GDP by the time of the next election and to cap spending on welfare.
The OBR said the new rules - in a draft Charter of Budget Responsibility - were “much less constraining” than those adopted by Mr Osborne, but there was still a one-in-three chance of them being missed.
But the Chancellor insisted: “The Prime Minister and I remain firmly committed to seeing the public finances return to balance as soon as practicable, while leaving enough flexibility to support the economy in the near term.”
Mr Hammond stressed that the OBR’s Economic and Fiscal Outlook confirmed the “underlying strength and resilience” of the British economy, but he acknowledged there was an “urgent need” to address long-term weaknesses.
In a departure from Mr Osborne’s strategy, he announced he would borrow £25.9bn in the next five years “to kick-start a transformation in infrastructure and innovation investment”.
“This Autumn Statement responds to the challenge of building on that strength, while also heeding the warnings in the OBR’s figures, as we begin writing this new chapter in our country’s history,” he told MPs.
“It restates our commitment to living within our means and it sets out our choice to invest in our future.
“It sends a clear message to the world that Britain is open for business and it provides help to those who need it now.”
The package included a number of measures to help the low-paid workers who are “just about managing” - dubbed “the Jams” - who Prime Minister Theresa May has identified as a priority.
:: A rise in the minimum wage for over 25s - the so-called National Living Wage - from £7.20 to £7.50 in April 2017, worth over £500 to a full-time worker
:: The continuation of the freeze in fuel duty, saving the average car driver £130 a year
:: Banning fees charged by letting agents to tenants
:: A reduction in the Universal Credit (UC) taper rate from 65% to 63%, allowing people to keep more of the benefit as they work
But critics said the UC reform failed to compensate for the losses low-paid workers will face from previously-announced cuts.
As part of his measures aimed at boosting the economy and tackling the country’s productivity crisis, Mr Hammond promised:
:: A new National Productivity Investment Fund of £23bn to be spent on innovation and infrastructure over the next five years
:: Additional investment in research and development, rising to an extra £2bn per year by 2020/21
:: A £2.3bn Housing Infrastructure Fund aimed at delivering up to 100,000 new homes in high-demand areas and £1.4bn made available to deliver 40,000 additional affordable homes
:: An additional £1.1bn investment in English local transport
:: Investment of more than £1bn in digital infrastructure and 100% business rates relief on new fibre infrastructure.