In his Autumn Statement, George Osborne announced major measures on housing, tax credits and public spending. Matthew Partridge looks at the major announcements and what they mean for the UK economy.
What's happened in the Autumn Statement?
In the summer George Osborne won wide praise from commentators for his Budget measures, especially a significant rise to the minimum wage for the over-25s (rebranded as the "living wage"). However, as it became clear that large cuts to tax credits would make many low-paid workers worse off (assuming they maintained the same working hours), opinion shifted. This culminated in the House of Lords passing a motion last month delaying the cuts until a plan to cushion the blow had been produced.
It was expected that Osborne would have to choose between sticking with the politically toxic tax credit cuts, making deeper than expected cuts to public spending, or missing the deficit targets. However, thanks to rosier fiscal projections, the chancellor was able to scrap the tax credit cuts entirely. (For a more detailed analysis of exactly how tax credits work, see Merryn's recent blog on the subject).
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So what is he doing about tax credits?
In the run-up to today's statement, Osborne had been under severe pressure to scale down the additional cuts to tax credits that he announced in the summer Budget. Instead of simply slowing them down, as he had been expected to do, he said he will be scrapping the planned changes entirely. However, due to the introduction of universal credit, tax credit will eventually disappear anyway. Meanwhile, the level of Housing Benefit will be capped.
The changes will mean that the government will miss its targets to cap the level of welfare spending (the welfare cap') in the next three fiscal years (2016-17, 2017-18 and 2018-19).
And what's going to happen about homebuilding?
Osborne says he will double the housing budget to £2bn to provide 400,000 new homes by the end of 2020. This will be achieved by removing restrictions on who can access shared ownership schemes, allowing tenants to buy Housing Association homes, and releasing government land suitable for 160,000 homes.
He has also committed to extending the equity part of the Help-to-Buy scheme in London, increasing the value of the loan 40% of the property's cost. Councils will be allowed to sell off properties and land and use the money to fund current spending.
What about changes to buy-to-let taxation?
The government had faced criticism from those who owned buy-to-let (BTL) properties to reverse its decision, announced in the Budget, to reduce the tax relief that they were able to claim. Instead, it seems to have doubled down on its clampdown, planning to increase stamp duty by 3% for second homes worth more than £40,000, including BTL properties. It argues that demand for second homes and BTL properties is making it harder to first-time buyers to get on the property ladder.
What about public spending?
Osborne also said he will reduce the scale of public spending cuts. This means that real (after-inflation) cuts to annual current spending will now be £10.4bn by 2020, compared with the £17.9bn expected in the July budget. The big beneficiaries will be education, defence and policing, with the police budget protected from all real-term cuts. The NHS will get £6bn of the extra £8bn promised immediately, although it will still have to make £22bn in "efficiency savings".
How will the government pay for this?
Osborne has been given a lot more room for manoeuvre by the Office of Budget Responsibility revising its future projections for government revenue (due to higher growth) and interest rate payments.
If these revenue growth projections prove to be overly optimistic, or if interest rates rise faster, the government could be forced to make further cuts, or risk missing its fiscal targets. Indeed, Nancy Curtin of Close Brothers is openly sceptical about the sustainability of the budget announced, stating that "it is clear there are further cuts to come". She also thinks that,"we can expect monetary policy to remain more accommodative".
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