What the Autumn Statement means for Britain’s finances

Matthew Partridge examines what effect George Osborne’s tinkering will have on the country’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.

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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

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.

Britain's economy heading for boom times again?

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.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri