In his Autumn Statement today, Chancellor George Osborne confirmed that austerity measures would have to last longer than expected, but he claimed that both borrowing and the deficit had fallen, which went completely against expectations.
- UK economy predicted to contract this year. Growth forecasts down for forthcoming years.
- Chancellor claims, backed by the OBR, that borrowing and the deficit are down.
- Welfare cuts, pension allowance adjustment, government efficiency, and tax avoidance crackdown all required to cut the deficit.
- Working-age benefits capped for first time, at just 1%.
- Annual tax-free pension contribution lowered from £50K to £40K.
- 3p rise in petrol scrapped.
- Business taxes to be lowered, while investment relief rises tenfold to support businesses trying to grow.
The Chancellor described the economy as “healing” and said that to turn back now on his course of austerity would be a disaster. But the measures were extended to 2018 as sustained low growth had led to higher borrowing than planned.
Revised growth forecasts supplied by the independent Office of Budget Responsibility (OBR) included a contraction of 0.1% in 2012 followed by weak growth of just 1.2% in 2013.
The Chancellor referred to the importance of maintaining fiscal credibility to international markets and reasserted his commitment to cutting the structural deficit.
Leaning heavily on the analysis of the OBR, he attributed the UK's poor growth record to the severe impact on exports caused by ongoing difficulties in the global economy.
Shadow chancellor Ed Balls condemned the findings, arguing that the deficit would be higher at the end of the term than the coalition had inherited.
Analysts have predicted that the timescale amendment for the deficit plan in addition to low growth could cost the UK its cherished AAA credit rating in the New Year.
As part of the measures designed to shrink the deficit, the Chancellor announced that higher earners would be expected to pay more tax on pension contributions.
The lifetime tax-free allowance on pension contributions is to fall from £1.5 million to £1.25 million, with the annual allowance to fall from £50,000 to £40,000.
As predicted beforehand, departments in Whitehall will be expected to make further efficiency savings. The Chancellor announced that budgets would be cut by 1% next year and by 2% in the following year, which will be used to fund 100 free schools and academies alongside front-line services.
Significantly, HMRC are to avoid this budget cut, and will receive more funds to tackle the notorious issue of tax evasion. The Chancellor announced a crackdown on tax avoidance, saying that £4 billion had been recouped in the lifetime of the current parliament but that much more had to be done.
He also confirmed the agreement with Switzerland to recoup £5 billion in six years from offshore bank accounts owned by Brits, which he claimed was the largest tax evasion settlement in British history.
Anti-poverty charity War on Want remained unconvinced, however, accusing the Chancellor of merely “tinkering around the edges” and of “sending a clear message that these big companies can keep avoiding tax.”
The measures in the Autumn Statement are "fiscally neutral", says Chancellor George Osborne.
Tax & Welfare
Further cuts to the welfare system will see the pressure mount on the poorest and the squeezed middle, as the Chancellor broke the traditional link between benefits and inflation.
While the basic state pension is to rise by 2.5% and disability benefits are to rise with inflation, working-age benefits were capped for the first time at just 1% for the next three years.
The Chancellor argued that public sector pay freezes had meant that those out of work had seen rises far in excess of those in work over the last five years.
With benefits normally aligned to the rate of inflation in September, working-age benefits rose by 5% in April, well above the 1% pay increase received by the majority of the public sector workforce.
There was a bonus for the lower paid, however, as the tax-free personal allowance was increased by a further £235 to £9,440, taking many thousands more out of tax altogether.
The so-called 'squeezed middle' were not so fortunate, with a below-inflation rise in the higher rate threshold designed to accrue an additional billion for the taxman. There remains a degree of acrimony about the decision make earlier this year to reduce child benefit for parents earning over £50,000.
Predicting an assault from the opposite benches, Mr Osborne defended the decision to cut the top rate of tax to 45% by arguing that tax rates of 50% had proved punitive and ineffective. Stats from HMRC, he said, proved that tax revenue had been much lower when the higher rate was implemented.
Addressing measures for growth, the Chancellor said that the existing Funding for Lending scheme, which was supporting mortgage lending, would add to the level of real GDP. The scheme, which was launched in August, had cut bank borrowing costs in the face of higher global credit costs, he said.
Small businesses were boosted by the surprise announcement of future tax cuts. While small profits tax rates are to remain at 20%, the rate of corporation tax is to fall to 21% from 2014.
Businesses will have also been encouraged by a tenfold rise in tax relief for capital investment allowance, which is rising from £25,000 to £250,000 for firms wishing to grow.
The Chancellor confirmed that investment in rail would continue, with consultation on the high-speed link to Yorkshire to continue next year. The government is also committed to aiding an extension of the Northern Line to Battersea, he said.
Fresh from selling the 4G network - the proceeds of which are aiding the current picture - the government announced funding for the installation of ultra-fast broadband in 16 smaller cities across the UK.
Importantly, for consumers and businesses alike, the proposed 3p rise in the price of a litre of petrol was scrapped altogether.
The Chancellor hopes that the measures will keep Britain "moving in the right direction". To Paul Johnson, Director of the Institute for Fiscal Studies, the "permanence" of the UK's low growth had proved the real problem in terms of the public finances, and this must be rectified if the UK is to solve its fundamental structural problems.
[Last Edited: 05 December, 23:00]
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