This month's Autumn Statement should bring some much needed clarity to the direction of the UK's public finances. In the wake of the EU referendum, the government could use the Autumn Statement to formally ditch the deficit elimination timetable. Chancellor Phillip Hammond may announce a 'fiscal reset' to emphasise public investment over austerity and the economic data that accompanies the statement will give the first comprehensive view of the Brexit vote's immediate impact.

Leaders across the public sector will be hoping that the Autumn Statement answers four key questions:

  1. Will the fiscal mandate or objective change? In 2011, the UK Coalition established a Charter for Budget Responsibility that required it, and subsequent governments, to set out objectives for their fiscal policy as well as a 'fiscal mandate' against which progress could be assessed. The original mandate committed the government to eliminating the budget deficit and beginning to see debt decline as a percentage of GDP. While the Chancellor adjusted the mandate's parameters in the years that followed, it has remained the government's financial yardstick.

    The fiscal mandate has been a constructive device that helped shore up confidence in the 2010-15 government's management of the public finances during a period of global financial instability. It also provided a transparent measure by which the government could be held to account, while maintaining flexibility to change according to economic circumstances. As the UK prepares to leave the EU, those circumstances could be changing so significantly that the government will consider whether to extend its timetable for the existing objectives, introduce new fiscal policy goals, or both. The 2011 Budget Responsibility and National Audit Act requires the government to set and maintain fiscal objectives and a mandate. –It also describes how the Treasury can change them, explaining why it needs to do so to the House of Commons.
  2. Will infrastructure spending replace austerity as the dominant fiscal theme? In early 2016, the Organisation for Economic Co-operation and Development (OECD) called on governments in advanced economies to shift away from austerity measures and invest more in infrastructure in order to boost sluggish economic growth. The International Monetary Fund (IMF) has recommended since 2013 that the UK should increase infrastructure spending, and this year called on all G20 nations to scale up their infrastructure spending in a bid to stimulate short-term demand and catalyse private investment.

    While austerity measures were recognised as a legitimate policy choice in the wake of the financial crisis, an alternative response now appears to be under consideration as the UK gears up for Brexit. Although the government announced increases in infrastructure spending last year, the Autumn Statement may go further still in shifting the government's emphasis from austerity to stimulus spending. The OECD and IMF views are backed up by OBR analysis that suggests spending on investment, public services and benefits are the interventions most likely to provide rapid economic boosts while also providing a platform for medium and longer term growth.

    Polling the public for Deloitte's State of the State shows that people want to see greater infrastructure investment, especially in public transport and healthcare – a move towards investment at the Autumn Statement could be well received.
  3. Will Brexit compromise or support public sector transformation? Leaving the EU is an era-defining task for the government. Political stakes are high and media scrutiny will be intense. But if the government recalibrates spending plans as part of a fiscal reset, it needs to recognise the importance of continuing other change programmes across the system. Our interviews with 40 public sector leaders for The State of the State found that many are concerned about the level of distraction Brexit will cause in Whitehall and the devolved governments, and whether it could jeopardise transformation programmes that are still needed to help public bodies make the most of their resources and cope with increased demand. The report's survey of people's expectations shows that the public sees the NHS as a greater policy priority than leaving the EU, suggesting an appetite for continued change and not a sole focus on Brexit to the detriment of public services.
  4. How long will the Government continue to run a deficit and increase its debt? When governments run deficits they make up the shortfall in their spending by borrowing. Even while the UK's deficit is reducing, the government has borrowed £471 billion since 2010-11, bringing its total debt to £1.62 trillion (84 per cent of the UK's GDP).

    A secondary element of the fiscal mandate established in 2011 was that debt should decline as a share of GDP. In March 2016, the OBR assessed that the government will miss this target in 2015-16 but is expected to achieve it in 2016-17. However, a fiscal reset and a shift to investment rather than austerity could change this outlook and the government could decide to borrow while interest rates are low.

Read more analysis in The State of the State 2016-17.

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