GEORGE OSBORNE’S 2015 AUTUMN STATEMENT AND SPENDING REVIEW

This is part of a series of occasional briefings produced by the London team at Kreab.  In addition to the tailored intelligence, monitoring and horizon-scanning prepared periodically for clients, we aim to provide updates on current and forthcoming events which are of more general interest in setting the context for change.

Analysis

Freed from the shackles of Coalition Government, the pressure was on the Chancellor to deliver in today’s Autumn Statement and Spending Review – his first both as Chancellor of a Conservative Government and of the new Parliament.

Reeling from last month’s humiliating defeat in the House of Lords over proposed cuts to tax-credits and haunted by the memory of the infamous 2012 ‘omnishambles’ budget, Osborne is eager to retain his perception as master strategist at the heart of the Conservative Government and remain in pole position to succeed the Prime Minister as Party leader ahead of the next election.

Shaped by the horrifying Friday, 13^th massacre in Paris, ongoing turmoil in the Middle East and a divided Labour Party under the stewardship of a self proclaimed pacifist, today’s Autumn Statement was intended to position the Conservative Government as the only Party able to offer the electorate economic and national security.

On the economy, the Chancellor heralded the Government’s success, declaring that no other economy in the G7 has grown faster than the UK in any year since 2010.

He announced that figures from the Office for Budget Responsibility show that the UK economy is expected to grow by 2.4 per cent this year, 2.4pc in 2016 and 2.5pc in 2017. Subsequently 2.4pc in 2018 and then 2.3pc in both 2019 and 2020.

The figures for 2016 and 2017 represent a 0.1 percentage point increase on previous estimates.

Osborne was keen to emphasise the contrasting fortunes between the UK and world growth, which has been revised down on concerns of persistent weakness in the Eurozone and rising debt in emerging markets.

Regarding defence, and in addition to the announcement earlier this week of the Government’s intention to speed up the purchase of new fighter jets to step up its “aircraft carrier punch” the Chancellor promised real-terms protection to police funding, marking a u-turn on previously announced cuts.

Politically the most significant announcement was the Chancellor’s second u-turn, this time over his intention to cut £4.4bn from tax credits.

James Quinn, Group Business Editor for The Telegraph speculated that while the decision is embarrassing for Osborne in the short term – and will provide ammunition to his opponents, in the longer term it will bolster his ambitions to succeed David Cameron.

The markets closed in positive territory with the FTSE 100 up nearly one per cent during afternoon trade to 6,337.64.

Highlights

Key Theme

• “Delivering economic and national security”

Key Points

• £27bn improvement in public finances
• £18.7 billion spent on slowing Whitehall cuts
• £6bn spending boost for the NHS
• U-turns over tax credit and police cuts

Summary

Spending Review

• Planned £4.4bn in tax credit cuts abandoned, with taper and threshold rates for working tax credits and child tax credits remaining the same
• As a result, government to breach overall welfare cap in first years of Parliament
• Government to borrow £8bn less than forecast, with the aim of securing £10.1bn budget surplus by 2020
• Total spending to rise from £756bn this year to £821bn by 2019-20
• State spending to hit 36.5%, as a share of total output, in five years – down from 45% in 2010
• Overall day-to-day departmental spending to be cut by £20bn, equivalent to 0.8% of total expenditure each year by 2020
• Policing, health, education, international aid and defence budgets protected
• Transport, environment and energy among biggest losers, resource budgets falling by 37%, 15% and 22% respectively
  

The Economy

• UK expected to grow by 2.4pc this year, then 2.4pc in 2016 and 2.5pc in 2017. Subsequently 2.4pc in 2018 and then 2.3pc in both 2019 and 2020.
• The growth forecasts for 2016 and 2017 were revised up, by 0.1 percentage points each.
• No economy in the G7 has grown faster than the UK in any year since 2010, the Chancellor says.
• Expectations for world growth have been revised down, on concerns about persistent weakness in the eurozone, and rising debt in emerging market economies.

Jobs

• The OBR believes that the UK will create 1m jobs over the next five years. The Conservative manifesto had promised to create 2m more jobs.

Homes

• The housing budget is being doubled to £2bn a year, in an attempt to deliver 400,000 new homes by the end of the decade.
• The housebuilding programme is the largest seen since the 1970s.
• The Government is launching a new London help to buy scheme. Londoners with a 5pc deposit will be able to get an interest free worth up to 40pc of the value of a newly-built home.
• Stamp duty rates will increase on second properties, such as buy to let homes.

Infrastructure

• Department for Transport capital spend will rise by half, to £61bn, the largest rise “in a generation”.
• There will now be a “permanent pothole fund” for road maintenance. Investing in the “transport we need, and the flood defenses too”.
• £250m to support motorways in Kent.
• Spend on energy research will be doubled.

Devolution

• Councils will receive the full amount of revenues from business rates, up from 50pc. They will also have the power to cut their own business rates.
• Local councils will retain 100pc of the funds received from their asset sales to enable them to “improve” the services they wish to provide.
• North Ireland’s assembly will have greater power over corporation tax, and will choose to set this at 12.5pc.
• Councils with responsibilities for social care will be able to levy a new precept of 2pc on council tax to fund care services.
• Local government will receive £10m to help the homeless.

Pensions

• The state pensions will rise by more than £3 to £119.30 a week from next April. It is the largest increase in 15 years.
• However, the state pension age will also rise. Mr Osborne says this will allow the triple lock on pensions to be maintained.
• The Chancellor says the Conservatives have left pensioners £1,125 better off a year since coming into power.

Tax

• Each individual will have their own digital tax account.
• The so-called “Tampon Tax”, VAT levied on the sale of tampons at 5pc, cannot be repealed because of EU rules. However, the £15m raised by it a year will be handed over to women’s charities.
• The Chancellor is introducing an Apprenticeship Levy at 0.5pc on the wage bills of large employers, raising £3bn a year from April 2017.

Health

• The Chancellor has announced a £6bn spending boost for the NHS, as fears grow that the healthcare system has been underfunded. It is the first £6bn of a total £10bn boost.
• The NHS budget for England and Wales will rise to £120bn by 2020, from £101bn. NHS in England expected to make £22bn in efficiency savings.
• In total, the Spending Review makes a commitment of more than half a trillion pounds to funding the NHS by the end of the parliament.
• A new goal of training 10,000 more nurses, with the cap on training places scrapped. Student nurses will now receive loans rather than grants.

Media Comment

The Daily Telegraph (James Kirkup): “We shouldn’t really be surprised by George Osborne’s retreat on tax credits, It’s what the Chancellor does: he talks like Margaret Thatcher, then acts like Tony Blair.”

Financial Times (Janan Ganesh): “Britons will no longer believe the Tories when they say cuts are inevitable”

The Spectator (Fraser Nelson): “George Osborne’s retreat on tax credits is genuine – and warmly welcome”

Further Reaction

Director-General of the British Chambers of Commerce (John Longworth): “Once again the ‘builder’ Chancellor has used the tools at his disposal to create a Statement that the majority of businesses will applaud.”

Director-General of the Confederation of British Industries (Carolyn Fairbairn): “This was a good spending review for longer-term investment in the economy but there’s a sting in the tail in the size and scope of the Apprenticeship Levy”

Director General of the Institute of Directors (Simon Walker): “Businesses see strong public finances as the basis for sustainable economic growth, and will welcome Osborne’s confirmation today that he aims to run a budget surplus by the end of the Parliament. The Chancellor was dealt a remarkably strong hand by the Office of Budget Responsibility, which is predicting stronger growth, lower than expected borrowing costs and significantly higher tax receipts. He’s chosen to play this hand with more spending than expected. Although departmental budgets outside the ringfence are seeing significant reductions in expenditure, overall the Chancellor will continue to preside over a rising real terms budget this Parliament.”

Initial Headlines

The Daily Telegraph – Autumn Statement 2015: George Osborne announces u-turn on tax credits, no cut to police budget and boost to house buyers

The Spectator – Did John McDonnell really think that quoting Chairman Mao would help Labour’s cause?

The Times – Autumn Statement: George Osborne scraps tax credit cuts for low-paid

The Independent – Autumn statement: Grants for student nurses to be scrapped and replaced with loans

Financial Times – Autumn Statement: Osborne’s tax credit U-turn is sign of weakness

Daily Mail – ‘The guardians of economic security’: Osborne targets second-home owners and big business to scrap tax credit cuts and promise to INCREASE funding for police