1.1 The UK economy is recovering from the biggest financial crisis in generations. Prior to the crisis, underlying competitiveness fell and economic growth was driven by unsustainable levels of debt, with the UK seeing the greatest expansion in debt of all the world's major economies over the last decade.1 As a result, the UK experienced the deepest recession of any major economy except Japan and the Government inherited a budget deficit forecast to be the largest in the G20.2 The June Budget 2010 set out the Government's strategy to address this legacy.
1.2 That emergency Budget succeeded in restoring stability and has secured low market interest rates. Since then, the economy has been hit by a series of further shocks. A sharp increase in global commodity prices has pushed up inflation. The Office for Budget Responsibility (OBR) estimate that "the main reason that GDP has grown less quickly over the past 18 months than the interim OBR expected in its June 2010 forecast is higher-than-expected inflation squeezing household incomes and consumption."3
1.3 The intensifying euro area debt crisis, driven by excessive levels of debt, now represents the most dangerous threat to the world economy since Lehman Brothers collapsed in autumn 2008. Even if this crisis is resolved quickly, the financial instability and uncertainty it has caused has been a blow to confidence and is damaging the UK economy.
1.4 It has been clear that the financial crisis of 2008 and 2009 reduced the UK's growth potential relative to the unsustainable pre-crisis trend, but the extent of that loss is uncertain. Most significantly for medium-term growth prospects, the OBR has now substantially revised down its assessment of the level of potential output. That is consistent with evidence from previous financial crises, which have shown large output losses typically persist for many years.
1.5 As a result of these three factors - the inflation shock, the impact of the euro area debt crisis on confidence, and the ongoing structural impact of the financial crisis - the OBR's November 2011 Economic and fiscal outlook shows that:
• economic growth has been revised down to 0.9 per cent for 2011 and 0.7 per cent in 2012, with a slower recovery thereafter;
• the trend level of economic output has been revised down by about 3½ per cent by the end of the forecast period. Comparing the OBR's trend output projection with an extension of the Budget 2008 projection, trend output will be around 13 per cent below the pre-crisis assumption by the end of the forecast;
• public sector net borrowing and the structural deficit have been revised up in every year of the forecast as a consequence of the weaker economy; and
• public sector net debt as a proportion of GDP is forecast to peak at 78.0 per cent in 2014-15, 7.5 percentage points higher than forecast at Budget 2011.
1.6 If left unaddressed, high levels of public borrowing and debt risk undermining growth and economic stability in the UK. They would also undermine fairness, as future generations bear the burden of this greater debt.
1.7 The intensifying international sovereign debt crisis has demonstrated the economic risks of high deficits and rapidly rising debt. Many countries have been forced to make faster and deeper cuts to their public expenditure than previously planned to maintain market confidence and restore stability.
1.8 In comparison, as a result of the clear and credible consolidation plans the Government has set out, the UK has been seen as a relative safe haven, with interest rates at record lows. This has helped keep interest rates lower for families, businesses and the taxpayer. The heightened risks to stability and growth in the current international environment make it all the more critical for the UK to maintain this market confidence.
1.9 The Government is therefore taking action to ensure that its fiscal mandate and debt target are met. The Autumn Statement confirms the spending totals for the years 2015-16 and 2016-17 and makes additional savings to current spending over the Spending Review 2010 period.
1.10 The Government will use all the levers at its disposal to protect the economy and rebalance growth for the future:
• returning the public finances to a sustainable position and meeting the Government's fiscal targets;
• taking tough decisions to deliver permanent savings in the medium and long term, including by setting plans for public spending in 2015-16 and 2016-17 in line with the spending reductions over the Spending Review 2010 period, increasing the State Pension age to 67 between 2026 and 2028, further controlling public sector pay and tax credits, and adjusting the allocation of Official Development Assistance in line with the OBR's revised growth forecast;
• using the savings from current spending generated over the Spending Review 2010 period to fund £6.3 billion of additional infrastructure spending, of which £1.3 billion was announced earlier in the autumn. Alongside this, around £1 billion of new private sector investment in regulated industries will be supported by government guarantee. The Government is also announcing commitments to £5 billion of capital projects in the next Spending Review period as part of the National Infrastructure Plan and is working with UK pension funds to unlock an additional £20 billion of investment in UK infrastructure. In total, the Autumn Statement supports around £30 billion of new capital investment;
• launching a package of credit easing measures, worth up to £21 billion, to improve the flow of credit to smaller and mid-sized businesses, complementing the monetary activism of low interest rates and quantitative easing;
• reforming the financial system to improve the regulatory framework, reduce risks and lower taxpayers' exposure to shocks in the financial system; and
• building on its major reforms to education, welfare, taxation and regulation with a new wave of supply-side reforms including changes to employment regulation, planning reform and active interventions, such as new Enterprise Zones, with tax incentives to support business creation and growth.
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1 The real effects of debt, Bank for International Settlements, working paper No. 352, September 2011.
2 Fiscal Monitor, IMF, May 2010.
3 Economic and fiscal outlook, OBR, November 2011.