Introduction

The ongoing implications of Brexit on UK public spending policy have been a significant topic of discussion. The HM Treasury's forecasts, while critical, have not fully materialized, leaving policymakers with an array of challenges. This document aims to explore the potential impact of Brexit on public spending over the next 5-10 years, focusing on revenue constraints and the challenges faced by the government in maintaining and adjusting its current policies.

Revenue Constraints and Public Spending

Despite the HM Treasury's initial forecasts suggesting a significant fiscal shock following Brexit, the reality has been somewhat different. Nonetheless, the economic uncertainties and subsequent changes in economic trends pose a substantial challenge to the UK's public spending policies. The primary issue lies in the reduced available revenue for government expenditure, which has direct implications for various policy areas.

Implications for Government Expenditure

In the context of government expenditure, nearly all areas will face severe pressures. This is particularly true for areas such as pensions, where the government must carefully navigate delicate political waters. Pensioners are a politically influential group, and cutting pension benefits could be politically risky. An astute opposition party, which may emerge in the future, could capitalize on any real cuts to pensions, framing them as a direct result of Brexit.

Given these pressures, it is likely that the government will look to postpone or eliminate certain financial commitments rather than cutting pensions in nominal terms. However, with rising unemployment, this pressure will be largely shifted to other budget areas, indicating a bleak outlook for fiscal policy.

HM Treasury's Initial Forecasts

In May 2016, the HM Treasury published a report titled "The immediate economic impact of leaving the EU," which outlined significant potential negative outcomes. The report's forward warned of an immediate and profound shock to the economy, resulting in a recession, increased unemployment, and a decline in GDP.

Thankfully, the forecasted economic impact has not materialized, at least not yet. However, these forecasts could come to pass as the UK moves forward with the exit process. It's important to note that forecasting economic risks is inherently challenging, and the months between the referendum and the triggering of Article 50 demonstrated the unpredictability of such events.

Pension Policy Challenges

The pension system poses a significant challenge for policymakers. Even if nominal cuts to pension benefits are avoided, policy adjustments will be necessary. One possible strategy is to raise the state pension age to 69 or 70. This can help alleviate pressure on the pension system while maintaining social support for older citizens. However, this approach is fraught with political risks and requires careful management to avoid public backlash.

Public Finance Targets and Fiscal Policy

The recent public finance commentary from the Office of Budget Responsibility highlights ongoing concerns about the UK's public finance situation. Missed deficit targets, underperforming tax receipts, and rising government spending all contribute to a challenging fiscal landscape. The government has abandoned its previous focus on austerity, with the last Chancellor, George Osborne, deciding to abandon previous public finance targets post-Brexit.

Philip Hammond, the current Chancellor, is expected to continue this approach. In the absence of robust fiscal strategies, it is likely that the UK government will rely on borrowing to address any financial shortfalls, both those caused by Brexit and other issues.

Future Challenges and Expectations

The upcoming autumn statement by Philip Hammond on November 23, 2016, will be crucial in revealing the government's plans for public spending. Expectations include continued emphasis on borrowing and a reluctance to implement significant tax rises, given the potential political fallout.

The next general election will be another key point, as political priorities may shift. Until then, the government's approach to public spending is likely to be driven by a combination of economic realities and political pragmatism.

Conclusion

While the initial impacts of Brexit on public spending policy have not been as severe as initially anticipated, the financial challenges remain significant. Policy areas such as pensions will continue to face pressure, and the government's approach will likely focus on maintaining social support through a combination of strategic financial adjustments and increased borrowing.