Osborne Has Opted To Put The Economy On A Riskier Path

Keeping up with last week’s Autumn Statement was all about staying upright, with your eyes wide open, in a blizzard of statistics. The numbers come thick and fast.

George Osborne plans to spend an extra £10bn on the NHS by 2020, he told us last Wednesday, while building 400,000 affordable homes. The police budget is protected and, burnishing his “one nation Tory” credentials, the Chancellor channeled further billions into foreign aid – now on course to receive more funding, by the end of this Parliament, than our very own Home Office. Then we had the headline-grabbing “rabbit”, as Osborne stunned the Commons by scrapping most of the controversial cuts to tax credits announced in his July post-election budget – wiping out a £4.4bn saving.

We heard a lot in this Autumn Statement about “cutting our deficit”. The reality is that, despite considerable reductions across some smaller departments, government expenditure is set to rise by almost 9pc over this Parliament – from £756bn to £821bn by 2019/20.

Inflation-adjusted spending should fall, but to an increasingly unambitious extent. During the pre-election budget in March, Osborne laid out real departmental spending cuts of 14.8pc between 2016/17 and 2018/19 – a meaningful 4.6pc annual reduction – before securing a decisive election victory in May.

In July, though, the cuts were drastically scaled back – as they were again last Wednesday. Real departmental spending is now set to fall just 2.3pc over three years, a miniscule 0.8pc per annum. That’s less than half the 1.7pc annual reduction we saw over the last Parliament – when the Tories constantly blamed their Liberal Democrats coalition partners for the slow pace of deficit reduction. Yet now, with a Commons majority, the cuts proceed at an even more glacial pace.

How has Osborne managed to combine his “fixing the roof while the sun shines” mantra with crowd-pleasing spending rises while junking his welfare cuts? Firstly, by raising taxes – to the tune of £5bn a year by the end of this Parliament, with local authorities raising another £2bn in addition from higher council tax.

Much of this extra burden falls on business – in the form of a 0.5pc pay-roll tax alongside employer national insurance for larger companies (labeled as an “apprenticeship levy” to deflect complaints). That’s on top of the 28pc rise in the minimum hourly wage firms must pay between now and 2020.

Then there’s a huge £3.8bn hike in stamp duty on buy-to-let properties – representing a 3pc increase across each price band, doubling the purchase tax on a £500,000 property to an enormous £30,000. While “generation rent” youngsters struggling to buy a home may cheer, this policy is unlikely to help them.

The tight property market in many of our big cities means landlords will pass this cost on, with rents likely to rise. That’s particularly true seeing as the stamp duty hike probably won’t apply to large property investment companies, disadvantaging small single-unit landlords – those likely to accept a kinder rental rate in return for low-hassle tenants.

For many such BTL buyers, often relatively ordinary families striving to invest wisely for their children and grandchildren, and sick of low-yielding banks and government bonds, this extra stamp duty could be disastrous. Along with earlier cuts to tax relief on rental income, it threatens to upend the retirement plans of countless couples who’ve worked hard and tried to do the right thing.

It’s not as if this BTL raid will help young families looking for a home – as it doesn’t address the underlying problem in the UK housing market, namely the lack of appropriate supply. The Chancellor’s pledge to build more affordable homes might help, if it happens, yet the unmet Tory house-building pledges in the last Parliament raises serious doubts. In the meantime, between now and next April, when this BTL stamp duty rise kicks in, expect mid-market house prices to surge – making life even harder for youngsters trying to buy a family home.

Amidst the statistical wind-tunnel, only one number really counted in this Autumn Statement – namely, £27bn. That was the jaw-dropping extent to which the independent Office for Budget Responsibility calculated the five-year outlook for the public finances has improved since the Chancellor last presented his tax and spending plans to the Commons.

With the OBR’s GDP forecasts up just 0.1pc in each of the next 2 years, to 2.4pc and 2.5pc respectively, little of this improvement will come from growth. Some of it stems from lower projected debt service payments, seeing as the OBR predicts on-going low gilts yields over the coming five years, an assumption which relies, perhaps, on the Bank of England engaging in yet more “quantitative easing”.

The large part of this £27bn improvement, though, rests on “changes in modeling” – in other words, new assumptions about how much revenue raised at each respective tax rate. While the precise contribution of such technical alterations to the revenue side of the government’s future balance sheet isn’t entirely clear, it’s double-digit numbers of billions – and very convenient for the Chancellor too. I find that quite astonishing.

So, let’s get this straight. Osborne has been handed a £27bn “windfall” by the OBR. Does he use this much-needed extra headroom to lower taxes, cut the deficit or even pay down some of our stock of national debt? No. The Chancellor is now set to borrow more over the course of his Parliament than predicted back in July – even though growth has improved, and he has an extra £27bn to play with. Despite all that, the government will borrow £18.7bn more over the course of this Parliament than was forecast just four months ago. So much for “fixing the roof”.

No-one is pretending this is easy. Having been handed a mandate to yank our public finances back into the real world, though, Osborne is being too timid. He seems to think spending largesse is now the route to the Tory leadership – but that may not be true. If the UK economy goes south, or is buffeted by events elsewhere, then tighter fiscal consolidation – rather than a heavy reliance on accounting smoke and mirrors – could start to look very smart.

The UK is ready for “some kind of external shock”, the Chancellor told us last Wednesday, “ready for whatever the world throws at us”, he re-iterated “prepared for any storms that lie ahead”. The global economy, as Osborne well knows, is fraught with financial, economic and geo-political risk.

The Federal Reserve’s first post-crisis interest rate rise, expected soon, could easily spark a major spasm on global markets. China, the world’s growth engine, is very much off its previous pace. The European Union, the world’s largest economy, the place where the UK does most business, is in a systemic crisis – the euro fragile, the spectre of terrorism looming, the free movement of goods and people under threat.

And then, of course, there’s the potentially explosive situation ing Syria – the possible resolution of which has just been made more complicated after Turkey downed a Russian jet, the first ever attack by a Nato member on post-Soviet Russia. If the bombing of IS intensifies, and regional tensions spiral – whether or not the UK joins the Syrian fray – widespread assumptions of a benign, growth-friendly oil price could go up in flames

This Autumn Statement, a barrage of numbers on one level, was really about a decisive shift in the balance between caution and risk. George Osborne, his ambitions now burning, just took a decisive step towards the latter.






1 comment
  1. Toffer said:

    Fabulous news: Remember simple maths: The less people that own multiple homes the more of us that can own one home of our own. This hopefully means a less greedy fairer society where the needs of the millions of Renters and First Time Buyers priced out of a decent home are put ahead of multiple home owning Buy to Let landlords and Buy to Leave investors. Remember houses should be primarily treated as homes to be lived in not as assets for the capital rich to get ever richer. At last the government is taking a step in the right direction.

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