UK Autumn Statement – Osborne fires election starting pistol

Osborne's off... Linford Christie, the Olympic 100m gold medal winner, once said a sprinter should go at the “B of the Bang”. The Chancellor has heeded his advice.

This afternoon George Osborne came out of the blocks with a blast of energy as the Conservatives set off towards the finish line of the 2015 General Election.

His Autumn Statement contained a blitz of announcements: a surprise stamp duty cut, business rate reform, £15 billion for road building, £2 billion each for NHS front line services and flood defences, APD abolished for children, and the petrol duty freeze extended.

All were aimed at sending a very clear message to voters: let us finish the job of eradicating the deficit and better times will follow.

But will the electorate buy it? And how robust is his long term plan?

The Chancellor has been forced to concede that he will not meet his target of eliminating the underlying deficit in the duration of this parliament. And as with the ‘net migration’ target, the Government isn’t just going to miss its deficit pledge it is going to miss it massively.

The Office of Budget Responsibility now predicts borrowing will be £91.3 billion in 2014/15, up from the previous estimate in March of £86.4 billion. This is mainly because of weaker than expected tax receipts. The Treasury had expected income tax and National Insurance to grow by 5% this year but the increase is only 1.8%. And oil receipts are markedly down as a result of market volatility.

The new promised date to eliminate the structural deficit is 2017/18 and Osborne has said this will be enshrined in a new Charter for Budget Responsibility. But this appears little more than a political gimmick as it will not bind a future Government.

Furthermore, this new date to eliminate the deficit hardly seems credible when considered alongside the cast-iron promise to deliver £7 billion of income tax cuts heralded by David Cameron in his party conference speech – repeated today – by raising the 20p tax threshold to £12,500 and the 40p threshold to £50,000 over the lifetime of the next parliament. Although the Chancellor and PM have stated they have “no plans” to raise VAT, it is hard to see their tax and spending plans making sense without another hike in indirect taxation.

A further round of spending cuts will also be much harder than the last with the ‘easy’ things already cut. Councils are starting to warn that they have been ‘cut to the bone’ and saying that they may in future only provide services required by statute.

The other negative for the Government is the wider global picture, with the Eurozone economy flat at best and with conflict raging in the Middle East.

More positive news for the Chancellor comes in the raft of economic data leaning in his favour. GDP growth is healthy – now estimated to be 3% this year and is up from 2.3% to 2.4% next year. Employment is soaring with unemployment tumbling. Earnings are nudging up while inflation is decreasing. Indeed, previous Chancellors have won elections with far bleaker economic outlooks.

George Osborne is gambling that voters will adopt a “safety first” approach in May, sticking with his economic stewardship in the knowledge that tax cuts and further increases in health spending are further down the line. He also hopes voters will spurn the risk and uncertainty associated with a Labour Government, which he claims has no serious plan to balance Britain’s books.

Ed Ball’s response was predictable. He castigated Osborne for failing to meet his 2010 pledge to the voters. And while seeking to re-establish Labour’s reputation for economic competence – claiming it will take the tough decisions to eliminate the deficit by 2020 – he sought to out-bid the Conservatives with the promise of an extra £2.5 billion for the NHS, over and above that promised by Osborne.

Today has been a foretaste of the next 150 days to the General Election, the longest sprint in history. It is too early to say who will end up on top of the podium.

Statement at a glance.

  • The Chancellor set out strong growth figures with a revision up on previous forecasts to 3% this year and from 2.3 to 2.4% next year. The budget deficit is down to £91.3bn this year, falling every year to 2017-18 when it is predicted it will return to a surplus. Yet the reality for the economy is still set to be challenging.
  • As trailed over the weekend, there will be an additional £2bn allocated for NHS frontline services and there will be a further £1.2bn for GP surgeries.
  • On income tax the tax free personal allowance will rise to £10,600 up from £10,500 next year.
  • There is a further freeze on fuel duty which will be a relief to many who fear the reintroduction of the fuel escalator.
  • There were also further changes to pensions as the Chancellor announced the abolition of tax on annuity payments that are made to spouses after their partner has died.
  • The so called ‘death tax’ on pensions inherited when someone dies will be abolished. There will also be an Inheritance Tax exemption extended to health workers killed in the line of duty.
  • In a popular move, likely to appeal to the middle classes, the Chancellor proposed the scrapping of air passenger duty for children under 12 from next May and for children under 16 the year after.
  • The funding for lending scheme will be extended for one more year with a focus on smaller firms.
  • Inherited ISAs will keep their tax free status when someone dies.
  • The Government has committed to commission and build homes directly for the first time in 45 years and there will also be a support for a garden city at Bicester.
  • There will be a ‘diverted profits tax’ of 25% tax on companies that make money in the UK and then move it overseas. The Treasury has today launched proposals to force multinationals to declare how much tax they pay in each country where they operate.
  • George Osborne signalled his backing for the devolution of corporation tax to Northern Ireland. This is a politically significant move which would allow the province to compete with the low business taxes in the Republic of Ireland. This could, in part, lay the ground work for a Conservative electoral pact with unionist MPs in a hung parliament.
  • The Chancellor announced a full devolution of business rates to Wales.
  • There was a bid to boost growth in the north through the development of the ‘northern powerhouse’ including £250m for the advancement of science in Manchester.
  • The Chancellor’s final announcement was the abolition of stamp duty, which is said to cut stamp duty for 98% of home owners, with no duty paid on the first £125,000. The changes are due to take effect from midnight tonight with legislation due to be introduced

George McGregor

Managing Partner, UK

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