As predicted by almost every UK political commentator and widely trailed in the media over the preceding days the Chancellor’s Autumn Statement unveiled recentlymade grim reading as an assessment of the nation’s finances. Although the Autumn Statement is intended to focus on updating forecasts for government finances this year there was a sense of added urgency around the set piece event.
This can be explained for two reasons. It is the Chancellor’s first major economic statement since the Budget in March and the subsequent ‘omnishambles’ which so damaged the government’s credibility and authority with almost every section of the electorate. But it also marks the half term point of this parliament and therefore opens up to glaring analysis George Osborne’s management of the economy to date and his economic strategy up until the planned general election in 2015.
As with any parliamentary set piece event there was the inevitable political rhetoric – ‘we are making progress’, ‘Britain is on the right track’, ‘turning back is not an option’ etc. coupled with an array of headline grabbing announcements.
Given the dire plight of the economy it was no surprise that the Chancellor opted to squeeze the banks for more tax. The City has accused Mr. Osborne of hypocrisy but in reality he needs the cash and having reduced the top rate of income tax in the last Budget he’s conscious of the need to buy political cover and he’s counting on little objection from the electorate at large.
The reduction in tax relief on the personal annual allowance from £50,000 to £40,000 is forecast to secure an additional £1 billion income per year. In terms of perception this announcement is crucial for the Conservative half of the coalition government as it attempts to nullify any criticism that it isn’t prepared to tax the wealthy and ‘make the richest pay their fair share’ a barb that the Labour leadership has effectively used to skewer the Chancellor and Prime Minister for much of the year.
Measures to cancel the 3p rise in fuel duty and raising the basic income tax threshold by more than £235 than was announced last year to £9,440 (moving a step closer to the cherished £10,000 ceiling) will have won Mr. Osborne plaudits on both the Tory and Lib Dem backbenches. But in reality the Chancellor was tinkering around the edges which given the nation’s current economic predicament is virtually all he’s able to do.
In an effort to reignite business investment Mr. Osborne outlined that he will use the forecast proceeds from the imminent 4G spectrum auction to pass on a series of temporary cuts to business. The most noticeable being the increase in the annual tax free investment allowance from £25,000 to £250,000. This measure has the potential to transform investment capabilities for small and medium-sized businesses which the CBI has referenced repeatedly must be the focus of the government’s efforts to reboot growth.
Perhaps the final ‘stake in the ground’ announcement, and clearly symbolic, comes at an intriguing time give the substantial political and media interest in the tax affairs of multinational corporates such as Google, Amazon and Starbucks. The Chancellor has chosen to cut the headline corporation tax rate by one more percentage point in April 2014 which means by the time of the next election the UK will have a corporate tax rate of 20% which will be the joint lowest of any G20 nation.
Announcements aside, the unavoidable fact is that the UK still faces an extended period of more tax rises and spending cuts which will now not end until 2017-18 – deep into the next parliament. Moreover, the majority of government departments will face further budget cuts of 1% in April 2013 compounded by another 2% cut in 2014-15 and these will be on top of existing budget reductions of around 17% by 2014-15.
This means that some of Whitehall’s key spending departments such as the Home Office, Ministry of Defence, Department for Transport, Department for Environment and the Department for Work & Pensions will have faced up to one fifth of their budgets being stripped out over the course of this parliament with the proceeds being poured into funding £5 billion investment in building schools and capital projects.
With growth at best anaemic and the Chancellor’s deficit and debt targets either missed (or by the government’s most optimistic interpretation muddied) there is a growing sense of the need to implement drastic measures to kick start growth. In last year’s Autumn Statement Mr. Osborne put in place a government guarantee to incentivise UK pension funds to unlock £20 billion of private investment into critical infrastructure projects, but in the past twelve months only £700 million of private finance has underpinned infrastructure construction.
Heading up Britain’s leading business trade association CBI Director General John Cridland has spoken of the need for government to guarantee ‘shovel ready infrastructure projects’, take on board the risk from design to the construction phase and genuinely incentivise private sector investment to build this vital infrastructure. Mr. Osborne’s intervention to begin building essential school and transport projects is a start and the promised replacement for the widely discredited PFI scheme which will see the public sector share the reward not only the risk are clearly steps in the right direction.
The Chancellor claimed that ‘it’s taking time, but the British economy is healing’. As he looks towards the turbulent Eurozone he knows he has room to breathe despite the credit ratings agencies already predicting a likely downgrade of UK government debt in early 2013. But for the Chancellor it could still be a whole lot worse. The Autumn Statement has bought Mr. Osborne and his coalition a stay of execution, but if growth remains as elusive in a year’s time he may have a much tougher job convincing his party, his coalition partners and the electorate that he’s the right man to steer the economy through these troubled times.
