What the Autumn Statement means for Britain’s finances

Britain is hugely in debt. When the coalition government came to power, the priority was to try to tackle that debt. So what did chancellor George Osborne do today?

Well, he certainly didn’t go on a spending splurge. Universal free school meals for infant pupils have been announced, at a cost of £600m a year. There’s also £300m being spent on funding the ‘green levy’ via general taxation, rather than through consumers’ energy bills.

However, these bills were balanced by various cuts. The government will be cutting the reserve (the amount of money put aside for contingency spending by government departments). It will also press some departments to cut spending further, releasing plans for a cap on total welfare spending. Finally, it is planning to save money by running the tax credit system more efficiently. Overall, these measures mean that overall spending will only increase by £135m.

Of course, you can argue that spending increases are definitely going to happen, whereas a lot of the stuff that comes under the ‘cutbacks’ heading is rather more hopeful.

This is not surprising. Osborne was hardly going to reverse the government’s key ‘Plan A’ strategy. And while there may be some giveaways nearer the election, there is no point doing it right now – it makes a lot more sense to delay any big upbeat announcements until closer to the election in May 2015, so that the government can reap maximum political impact.

Even infrastructure, the big destination of any cash being raised, got relatively little attention. While the longer Autumn Statement document mentioned agreements over nuclear power plants, most projects are dependent on long-term financing, only a fraction of which has come through. And the fact that these projects will take shape after the election means these commitments can be dropped or modified as the situation demands.

Cutting a little by trying to crack down a lot

Osborne was a bit more generous on the tax cut side. There are four big headline grabbers – but they mostly came with small print that lowers the impact.

Fuel duty was frozen, as expected. Then there was the ‘marriage allowance’, which allows one partner to give £1,000 of their tax allowance to the other. That sounds potentially exciting – but it’s restricted to basic-rate taxpayers. If anyone in the household pays higher-rate tax, they won’t get the allowance.

There was a cut in National Insurance for younger workers – employers won’t have to pay NICs for the under-21s – which is good news at the margin for younger job-seekers.

And finally, small businesses were given some relief on rates: a £1,000 discount on business rates for small retailers for two years, and a 2% cap on future rate hikes.

How will he pay for that lot? By that old chestnut, cracking down on avoidance. While most of the experts believe that Osborne is over-optimistic on what he can achieve with anti-avoidance measures, the overall fiscal impact of these minimal cuts will be very small in any case. That’s probably because, again, he’ll be keeping his powder dry ahead of the election.


Sign up for a 3-week FREE trial of MoneyWeek
and get the following free as well

MoneyWeek magazine signup

"The only financial publication I could not be without."
John Lang, Director, Tower Hill Associates Ltd


Britain’s economy – heading for boom times again?

With not much in the way of either taxing or spending, the government is again hoping that growth will save the day for the UK.

The Office for Budget Responsibility (OBR – the independent watchdog set up by the coalition) reckons UK growth will be higher than it originally thought. In April, it had expected growth of 0.6% this year and 1.8% next. Now that’s gone up to 1.4% this year, and 2.4% the next.

There is even hope that real (after-inflation) wages could start growing. That would boost tax revenues and also mean lower welfare spending. For example, stamp duty revenue is expected to rise to £8.9bn this year, from £6.9bn. And the OBR thinks the budget could return to surplus by 2018/19.

Before you start cheering, let’s make something clear – the OBR is saying that the government will finally stop spending more than it takes in each year by 2018/19. That’s what it means by a surplus. So until then, the national debt will relentlessly keep growing year by year. The deficit is expected to remain at 6.8% of UK GDP both this year and next.

And even at that, this is reliant on some pretty optimistic projections. The OBR’s forecasts are based on a sharp rise in consumer spending, and property prices are expected to rise by 5% next year and 7% in 2015. At a time when pension managers are being warned that a 7% average return figure is overly optimistic, those are pretty chunky returns. In other words, much of the recovery depends on the property bubble continuing to reflate smoothly.

It also means that the Bank of England is being left to do the heavy lifting on the economy with its control of monetary policy. And that’s tricky. If the economy improves as much as the OBR hopes, then Mark Carney will be under pressure to raise interest rates. But if he does so, both spending and property price gains could start collapsing, hitting growth and blowing a hole in the deficit target.

Indeed, the lack of large giveaways suggests that the government knows that the recovery is more fragile than it is claiming. Overall, we can expect rates to stay low, with a huge amount of pressure on the Bank of England to keep property prices rising.

• Stay up to date with MoneyWeek: Follow us on TwitterFacebook and Google+


ScreenHunter_01 Mar. 25 09.51

New to MoneyWeek?

Ed Bowsher Editor Money Week

Welcome, and thank you for visiting us.

Here at MoneyWeek, our aim is simple. To give you intelligent and enjoyable commentary on the most important financial stories of the week, and tell you how to profit from them.

If you've enjoyed what you've read so far, I've got something you'll definitely be interested in.

Every working day the MoneyWeek team sends out a hard-hitting email, 'Money Morning', giving you a rundown of the latest financial events, and revealing what you should do to maximise profits and head off losses…

And with your permission, I'd like to send you Money Morning for FREE.

To sign-up enter your email address below.

We hope you enjoy your stay on the site. Good luck with your investments!

Ed Bowsher,
Digital Managing Editor, MoneyWeek

(No thanks)

Because these emails are completely free, we do have to fund them with advertising. Occasionally we will send you promotional emails, however we will never give, sell or rent your email address to any other companies.For more information, please see our Privacy policy.

4 Responses

  1. 05/12/2013, Boris MacDonut wrote

    “When the coalition government came to power the priority was to try to tackle the debt”.
    Since May 2010 ,3 years & 6 months, total Government borrowing has been more than in the whole of the last Labour Government that lasted 13 years. They clearly haven’t tried very hard as they have borrowed at three times the rate of the previous government who have been portrayed as spendthrift.
    Still it is nice to see that Osborne’s key plan is to “hope” things improve.

    • 05/12/2013, Critic Al Rick wrote

      Boris – sorry but I can’t resist – such is the reality you are happy to embrace.

      Excepting by a miracle or very real (as opposed to present lip-serviced) austerity, the Budget Deficit will never be sustainably eradicated let alone, excepting by catastrophic default, the National Debt.

      Still, we can hope to be swamped by millions of spendthrift Chinese tourists…

      • 07/12/2013, Boris MacDonut wrote

        Rick. It may seem a bit simple but being able to borrow and to borrow more is a sign of relative wealth. It is the poor who cannot afford to borrow.

        • 08/12/2013, Critic Al Rick wrote

          Boris, wealth is not necessarily forever. UKplc is not servicing its loans via wealth creation but via asset stripping and plunder of the wealth of its Truly (not Quasi) Private Sector (working and retired).

          It is not just the poor who cannot afford to borrow; it is also those whose expenditure is greater than their income.

Comment on this article

MoneyWeek magazine

Latest issue:

Magazine cover
Walking out on the banks

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 3 FREE Issues
Shale gas 'fracking' promises to transform Britain's energy market. Find out what it is, what it means, and how to invest.

More from MoneyWeek

The problem with the Bank of England

Fracking: Nine reasons not to get carried away

Five small-cap stocks worth a flutter

This Dutch company could help us tame floods

ScreenHunter_01 Mar. 25 09.51

Get the latest tips and investment opportunities from MoneyWeek magazine: Claim 3 FREE Issues HERE