Introduction
It was a sign of the times that the first official word on George Osborne’s Autumn Statement was a tweet from his boss. David Cameron told his 178,514 followers on Twitter: We are on the right track and making progress. His previous tweet had intimated that the Chancellor would announce further investment in education, but the general mood among commentators awaiting the Statement was far less upbeat.
With the world economy still in the doldrums and Europe in its own double-dip recession, the UK had a budget deficit of more than £100bn as the Chancellor stood up to speak. The bulk of his speech was therefore expected to concentrate on measures to fill this hole, with action on pensions, tax avoidance, welfare cuts and fuel duty all well trailed. Whilst Osborne had ruled out the Lib Dems’ plans for a ‘mansion tax,’ there were rumours of ‘son of mansion tax,’ possibly in the form of yet higher stamp duty on properties valued in excess of £2m.
The key debate prior to the Chancellor’s speech centred on the balance of cuts to tax rises, with the left-of-centre think tank the IPPR saying that the ratio was running at 96% in favour of cuts. Osborne was said to be aiming for an 80:20 ratio of cuts to tax rises, but whatever political standpoint you came from, one thing was undeniable: the Autumn Statement would see the continuation of austerity. Whether that was until 2015, 2016 or the indefinite future, only time would tell…
The Chancellor rose to speak at 12:35 on Wednesday December 5th. His first words – to Opposition jeers – were “The British economy is healing.” Once the Speaker had restored calm, he went on to make some key points on growth, the deficit, UK debt and borrowing.
- The Office of Budget Responsibility had adjusted its growth forecast for the UK economy in 2012 to -0.1% with declining trade (for that, read Europe and the rest of the world) to blame
- Growth is then forecast to rise steadily through to 2018. The Chancellor also pointed out that the contraction in 2008/2009 had been far worse than had been thought at the time
- he budget deficit is forecast to fall as a percentage of GDP year on year through to 2018, and has fallen by a quarter in the last two years. This has meant an additional saving of £33bn on interest payments compared to predictions made two years ago
- However, the OBR confirmed that the Government would fail to meet its target of having net debt falling as a percentage of GDP by 2015. This will now not happen until 2016/2017
- Government borrowing – forecast at £108bn for this year – is expected to fall steadily over the next five years, and is estimated at £31bn in 2017
Fuel Duty
| What | The 3p litre rise in fuel duty that had been planned for next January was cancelled |
| When | Immediately |
| Comments | Happy Christmas! |
Benefits, Pensions and welfare
The Chancellor’s general thrust here was that more should be done for working people so that it paid to work, not to “stay at home with the curtains drawn.” Changes to welfare were introduced which will save £3.7bn by the year 2015/2016. The following specific measures were introduced.
| What | Lifetime pension relief allowance will fall from £1.5m to £1.25m |
| When | From the tax year 2014/2015 |
| Comments | This had been widely trailed, and was presented as the better off playing their part in the economic recovery. In practice, very few people get anywhere near this level of pension fund, but the Government still expects this move to bring in £1bn |
| What | The annual tax free limit for pensions will be reduced from £50,000 to £40,000 |
| When | From the tax year 2014/2015 |
| Comments | A move that goes hand-in-hand with the reduction in lifetime allowances |
| What | Those already retired with pension drawdown arrangements will be able to take a higher income – with the limit rising from 100% of an equivalent annuity purchase to 120% |
| When | From April 2014 |
| Comments | A sensible move, with the Chancellor siding with a reasoned argument from the pensions industry |
| What | Basic State Pension will rise by 2.5% to £110.15 per week |
| When | From next year |
| Comments | Again a move that was expected, and will be welcomed by pensioners |
| What | Child Benefit will increase by 1% |
| When | In both April 2014 and April 2015 |
| Comments | Although this is welcome for parents it is a very small rise – and it is important to remember that many higher earners will lose child allowance from January of next year |
Taxes and Allowances
The Chancellor was keen to emphasise how much was being done to combat tax avoidance, and on the morning of the Statement it was announced that a ‘deal had been struck’ between Starbucks and HMRC. Significantly, HMRC escaped the cuts that had been signposted for all Government departments as the Chancellor sought to strengthen their hand in pursuing taxation receipts. HMRC will receive £77m to fight tax avoidance by wealthy individuals and multinationals, in a move which the Chancellor predicted would bring in £2bn in receipts.
He also announced a treaty with Switzerland, which will see £5bn come into the Government’s coffers over the next six years from bank accounts held by UK residents. No new property taxes were introduced as the Chancellor once again rejected the idea of a ‘mansion tax.’ The specific taxation measures were:
| What | The basic income tax threshold is to be raised next year to £9,440 – £235 more than previously announced, to give a total rise of £1,335 next year |
| When | From April 6th 2013 |
| Comments | Clearly good news, and another example of the Chancellor seeking to encourage work as opposed to dependence on benefits. This rise will also benefit higher rate tax payers |
| What | The threshold for the 40% income tax rate will rise by 1% in 2014 and 2015, from £41,450 to £41,865 and then £42,285 |
| When | From April 6th 2014 |
| Comments | These increases are likely to be less than the level of pay rises, especially in the private sector. This process – known as ‘fiscal drag’ – could see up to 400,000 more people paying higher rate tax in a move which is expected to raise an additional £1bn in tax revenues |
| What | Corporation Tax – the main rate will be cut by an extra 1% to 21% from April 2014 |
| When | From April 6th 2014 |
| Comments | Again, the Chancellor is doing what he can to encourage business. He backed this up by extending the temporary doubling of the small business rate relief scheme to 2014 and announcing an extra £1bn of capital for the Business Bank |
| What | Inheritance tax – the threshold is to be increased by 1%, taking it from £325,000 to £329,000 but not until 2015/2016 |
| When | From April 6th 2015 |
| Comments | Inheritance tax is a very easy tax for the Government to collect. However with house prices at best static, the Chancellor cannot rely on house price inflation to boost his coffers this year. Delaying what is at best a token rise until 2015 did not impress the Chancellor’s backbench MPs |
| What | Individual Savings Account (ISA) limits were increased to £11,520 |
| When | From April 6th 2013 |
| Comments | Those people who won’t now be able to contribute significant amounts to their pensions would have hoped for a healthy rise in the ISA allowance – but it was never going to happen |
| What | The capital gains tax annual exemption will increase by 1% in 2014 and 2015, eventually reaching £11,100 |
| When | From April 6th 2014 |
| Comments | Again, a very small rise in a tax relief which the majority of people don’t use as much as they should |
Government Spending
As was widely expected, George Osborne announced some major spending plans, confirming the ‘leaks’ before the Autumn Statement that there would be good news for education and the infrastructure. While Government departments will see their budgets cut by 1% this year and 2% next year, the NHS and schools are exempt from this. However, there are suggestions that national pay bargaining for teachers could be on its way out. Local government budgets will be cut by 2% in 2014.
The key points of Government spending announced by the Chancellor were:
- The share of national income spent by the state is predicted to fall from 48% of GDP in 2009/10 to 39.5% in 2017/18
- There will be investment of £5bn in the country’s infrastructure over a two year period, including investment in roads and the extension of the high speed rail link. The Northern Line will be extended to Battersea
- There will be an additional investment of £600m in science, £270m for further education and an additional £1bn for schools – to “upgrade good schools and build 100 new free schools and academies.”
Jobs and the Economy
The Chancellor was keen to emphasise the good news, pointing out that since the election 1.2m jobs have been created in the UK private sector. The Opposition were quick to counter that a similar number have been lost in the public sector, but with the Office for Budget Responsibility predicting that UK unemployment would peak at 8.3% (well below the average for the Eurozone) the Chancellor could afford at least half a smile.
Despite this good news, it still looks likely that austerity will be the watchword in the UK until 2017/2018.
Conclusions
As stated in the introduction, there was some good news and some bad news from the Chancellor but, given the state of the world economy, the figures and the outlook could have been much worse. The simple truth is that whatever George Osborne says or does, events in the wider world will have at least as much impact as he does on the UK economy – if not more. The Chinese economy is slowing down, the US is rumbling towards its Fiscal Cliff and the problems in Europe need no further documentation. David Cameron’s tweet may have been accurate – but he might well have added, there’s still a very long way to go.
