The Context
With the UK unexpectedly vetoing the EU's latest proposed treaty, this article considers the context and content of the recently released Autumn Statement, which sets out the basis of the Government's fiscal policy going forward.
The Autumn Statement came against a backdrop of increasingly negative economic forecasts for the UK over the coming quarters. What had been intended as a routine update on the progress of the Coalition’s recovery programme instead became a major test of the Chancellor’s austerity policy, with George Osborne attempting to defend his approach against claims that it has been too severe to allow necessary growth.
Unsurprisingly, Mr Osborne made a point of starting with the “good” news which was that, contrary to predictions from major economic think tanks such as the OECD, the Office of Budget Responsibility is not forecasting a recession. However it has slashed growth figures to a near-flat 0.7% next year, down from 2.5%.
His statement was framed around the conviction that continued confidence in the UK’s gilt investments, meaning it was the only major Western country that had its credit upgraded in the last 18 months and would see a saving of £22bn because of lower interest rates, had to be protected as an overriding priority against the “debt storm” elsewhere. Whilst growth would not be easy, 2% would be achieved in 2013, with a steady upturn in the years to follow. We have seen quite how far the Government is prepared to go to see through this policy, preferring recently to veto a European treaty in order to protect the UK’s interests.
Replying for Labour, Shadow Chancellor Ed Balls called the Autumn Statement an admission of the Chancellor’s “truly colossal failure”. In a highly critical rebuke, he said that with growth flat-lining, rising unemployment and over £100bn more being borrowed this year than planned, the Government’s economic and fiscal strategy was “in tatters”. Economic recovery had been “choked off” a year ago and now only Cyprus, Greece and Portugal were growing more slowly. Balls said that low borrowing rates were not a sign of confidence, rather a symptom of stagnant growth. He urged the Government either to change plans or change Chancellor, stating that Osborne must alter his course immediately, admit that he was wrong, and avoid a “catastrophic error of judgment”.
The Content
Main Headlines
- Due to cut growth forecasts, borrowing will now be £112 billion more over the next four years than previous forecasts.
- Pension age to rise to 67 by 2026.
- Bank levy increased to 0.088%, raising 2.5bn.
- 1% cap on public sector pay rises for two years after the end of current freeze next year.
- The Office for Budget Responsibility increases its estimate of the public sector jobs expected to be lost - now 710,000.
Sector specific announcements include:
Infrastructure Finance
A Memorandum of Understanding with two groups of UK pension funds to support additional investment in UK infrastructure. The Government will target up to £20 billion of investment from these initiatives.
An Insurers’ Infrastructure Investment Forum, joint with the Association of British Insurers
Education
The Government has committed to additional spending in education of £1.2 billion.
This will go towards an extra £600 million to fund 100 additional Free Schools by the end of this Parliament. This will include new specialist maths Free Schools for 16-18 year olds, supported
It will also see an additional £600 million to support those local authorities with the greatest demographic pressures. The funding is enough to deliver an additional 40,000 school places.
Housing
A new build indemnity scheme to increase the supply of affordable mortgage finance for new build homes; and strengthen the Right to Buy.
Home buyers able to purchase new build houses and flats with a five per cent deposit. House builders and the Government will help provide security for the loan.
For each home purchased, the Government will provide an additional affordable home, in addition to plans to deliver through the new Affordable Homes Programme.
Local Authorities
Considering allowing city mayors and partner local authorities to borrow against the income they receive through the CIL as part of its commitment to deliver tax increment financing (TIF) powers, where they can make a significant contribution to national infrastructure priorities. Further details will be set out in the Local Government Resource Review in December 2011.
Charities
VAT exemption for services shared between VAT exempt bodies, including charities and universities.
Zurich/CBI event:
Following the Autumn Statement, Zurich continued its long-standing partnership with the CBI to host a high-level discussion between industry and HM Treasury. Held at the Duke’s hotel in London on December 6th, Treasury representatives from the Macroeconomic prospects, Growth and Productivity and Infrastructure teams engaged with some of the world’s largest businesses, including Deutsche Bank, PepsiCo, Standard Chartered and PwC.
