Dec
06
2012

The Chancellor’s Autumn Statement 2012

The Chancellor again faced a challenging background in presenting his Autumn Statement today as a stagnant economy over the past year shifted his deficit reduction strategy further off course. Missed targets meant that, as in last year’s Statement, the austerity programme has been extended to allow room for manoeuvre in boosting the flagging economy. But there is in reality little scope for manoeuvre. The best that can achieved in difficult circumstances is a fiscally neutral package, using money raised from tax changes, a squeeze on benefits and spending cuts to fund supportive measures including infrastructure projects and a further cut in corporate taxes.

There were few surprises as far as the big picture on the economy and government finances is concerned. Once again the Chancellor was faced with a downgrading in the Office for Budgetary Responsibility’s (OBR) projection on the economic outlook and government finances. The OBR’s economic outlook has finally accepted the reality that the nature of the UK’s challenges mean the recovery will remain on a lower gear over the medium term. That said, their GDP projections remain, in our view, on the optimistic side and therefore, so is their conclusion that the deficit target can be met on time by 2016/17. The one-year delay to meeting the supplementary debt target is also optimistic.

In terms of the details of the package, the emphasis was very much on supporting infrastructure, low to middle-income earners and companies. The key measures announced were:

  • £5.5bn of additional infrastructure investment, focused on roads and schools.
  • 1 percentage point cut in the main rate corporation tax to 21% from April 2014.
  • Temporary increase of the annual investment allowance from £25,000 to £250,000 for two years.
  • £1bn towards a new Business Bank.
  • Cancellation of 3p/litre increase in fuel duty planned for January 2013 and deferral of April 2013 increase to September.
  • Increase in personal allowance by a further £235 in April 2013 to £9,440.

The key measures to pay for all of this are:

  • Departmental spending cuts of 1% in 2013/14 and 2% in 2014/15. Also spending cuts will extend into 2017/18.
  • Uprating of most working age benefits and tax credits by only 1%, rather than inflation, for 3 years from April 2013.
  • Limit the uprating of the higher rate tax threshold to 1% instead of inflation over the next 2 years
  • Reduce lifetime allowance for pension contributions from £1.5m to £1.25m and reduce annual allowance from £50,00 to £40,000
  • Raise bank levy to 0.13%
  • £3.5bn from the 4G spectrum sale
  • Additional measures to reduce losses related to tax avoidance and evasion.

As for the impact on the overall economy, the extended austerity timetable and the continued emphasis on spending cuts will mean that the government sector is unlikely to be a driver of economic growth or jobs until at least 2017/18. Investment should be boosted by new infrastructure spending and raising of the investment allowance. The overall impact on household consumption is less certain as the extra support to ‘middle income’ earners from the raising of the tax threshold is offset somewhat by the additional squeeze on both the highest and lowest income groups.

The timings of the fiscal plans is also noteworthy as the aggregate impact of the measures actually amounts to a giveaway over the period 2013-2016, with the bias swinging sharply back to a net-takeaway over 2016-18. Clearly the government has the next election date at the forefront of its mind.

However, success at the next election requires an economy back on the growth path and the government has limited room for manoeuvre. Instead, the performance of the UK economy will depend upon a revival in consumer and business confidence. Another critical factor will be how events unfold for the eurozone and its impact on export performance and credit conditions – something which the UK government has little control over.


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