Autumn statement 2012: as it happened

‘Worse still, if the Bank loses control of inflation, bursting the bond market bubble, the game will be up. The Treasury and Bank of England would face appalling choices:  either interest rate rises and a brutal correction or more money creation in a self-defeating attempt to keep rates low.

‘There was some good news today but the real question is this: can the Government keep skating on thin bond market ice until the good times come again? ‘

‘From our sub-arctic chancellor this was a rip-roaring performance. Using all the arts perfected by Gordon Brown, he dazzled the house with his Autumn Statement. A chancellor should never be entirely candid. His job is to blame others for failure, to take credit for all successes, (no matter what their true origin), to engender confidence in the future and to attract cautious applause. George Osborne did all this.’

The Liberal Democrats are keen to use today to show that Coalition works, but Lord Oakeshott is in a less charitable mood. I’ve just had a chat with him about George Osborne’s explicit rejection of the mansion tax in his statement today as ‘intrusive’. The former Lib Dem Treasury spokesman in the House of Lords says:

‘I’m not withdrawing anything I have said about the Tories and the mansion tax. Intrusive is exactly what taxes on high earning tax dodgers have to be. George Osborne has performed a screeching handbrake turn on Tory donors’ orders.’

If you take the OBR’s forecast for 2015 and compare it to the IMF’s forecast for the deficits in other major Western economies, the results are not pretty (below). Rather than having abolished the deficit, as Osborne hoped to have done just two years ago, the UK will now have the biggest deficit in the Western world. The impact of this is, of course, softened by the collapsing gilt rates.

Memo to Carney: we’re debt addicts!  Interestingly, the Budget has a memo showing how much Osborne’s economic model depends on low gilt rates. Table 1.3 says that if the rates go up 1 percentage point, it costs the government £21.7. By 2 points, it’s £43.8 billion. By 3 points (which would take us back to normal rates) it’d be an almighty £66.4 billion. Now, the UK’s low gilt rates are not proof of UK credibility, as the government likes to say. It’s purchased by QE and Sir Mervyn’s Magic Money Machine. Given that QE is understood to have lowered UK gilts by 0.7 to 1.5 points, this implies QE has saved £15 billion to £32 billion each year. But money, of course, cannot be magicked out of thin air. That cash will have come from pension funds (via lower rates of return on investments) and savers in general. QE will have also seen the assets the richest tenth surge by a six-figure sum.

The importance of Osborne’s 4G magic trick. A friend emails to say ‘all the cash is coming from either the sale of 4G or an unspecified tax hike or spending cuts of £4.6bn after the next general election’. Here’s the table:

14:57: The Spectator’s leader this week (which has just gone to press) on the statement is entitled ‘The great creep forward’. Here’s a preview:

14:51: Tracking the recovery. On today’s OBR forecasts, it’ll be late-2014 before GDP is back to its pre-recession peak. Here’s how the current ‘recovery’ compares to previous ones:

14:44: The CBI has reacted positively to Osborne’s statement:

‘£5 billion on near-term infrastructure, like the tube to Battersea, half a billion a year tax relief for small firms, and £1.5 billion extra export support should boost investment and create jobs. The Government now has everything to prove by delivering. Businesses need to see the Chancellor’s words translated into building sites on the ground.

‘It is no surprise that after a difficult year the economic realities dictate that austerity and debt reduction will take longer. The Chancellor has stuck to his guns on deficit reduction – avoiding deeper cuts or more borrowing in order to retain international credibility.’

14:36: Fraser is digging through the small print of the statement:

Osborne the Tax Cutter: today’s mini-Budget means small tax cuts every year until the election. In 2016-17, taxes will rise by £295 billion then £205  billion the year after. Spending is cut by £4.8bn this year, quite some figure. Then by just under £1  billion for the rest of this parliament. (Table 1, p9)

Osborne has no plans to balance budget: the forecast stretching to 2017-18 still shows state spending above receipts. UK may go two decades without ever balancing its books (Chart 1.7, p23)

14:26: Isabel writes in that the Liberal Democrats are already claiming victory over the personal tax allowance increase:

As I predicted, the tussle on tax has begun. Danny Alexander has sent out this email to Lib Dem activists (quite a feat as he’s currently on the TV, too):

‘Today it has been announced that from April more than 20 million people will be paying nearly £600 a year less in income tax than they were in 2010. That’s putting real money back in the pockets of ordinary families in tough times. Thanks to your campaigning, we’re delivering on our number one election pledge. The Autumn Statement set out the tough decisions Liberal Democrats are taking in government to build a stronger economy and fairer society. We have to fix the economic mess left by Labour and the banks, bring the deficit down, maintain our international credibility and create a platform for jobs and growth. We are asking the wealthy to pay more. We are bringing down the cost of our welfare system and cutting Whitehall waste. We’re helping small businesses too, by cutting taxes on new investments they make. And our actions to keep fuel duty down help small businesses and families alike. The road to recovery is longer than we hoped, but we are committed to finishing the job and making Britain’s economy strong again – so that everyone can get on in life. We should be proud of the role Liberal Democrats are playing in sorting out our country’s economic problems.’

Note that in the sentence before the line about ‘bringing down the cost of our welfare system’, Alexander argues that the government is making the wealthy pay more. This was the key deal that the Lib Dems were looking for in order to sign up to the welfare cuts. What will be interesting will be whether the Lib Dems give any clues about the ‘nasty’ bits that they blocked from the statement.

14:24: Tracking borrowing. What do the OBR’s borrowing figures look like when all the accounting changes are stripped out? It’s down very slightly this year — from £121.4 billion to £120.3 billion — but it’s not coming down nearly as quickly as hoped:

14:11: Isabel reports the reaction to the news that Osborne is dropping the planned rise in fuel tax:

George Osborne was keen to pitch his Autumn Statement to the ‘strivers’, and one of the key ways he did this was by scrapping the 3p rise in fuel duty that had been due for January.

This is good news for Conservative MPs in marginal seats full of commuters, and especially good for Robert Halfon, who has campaigned tirelessly on this issue. Halfon is pleased, adding his own striver pitch in his response:

‘This was a Robin Hood statement. George Osborne has put fuel in the tank of the British economy. He has not just delayed Labour’s 3p petrol tax, but scrapped it altogether. This will save an ordinary motorist in my constituency of Harlow around £80 next year. When families are hard-pressed, the Government should do everything to keep the cost of living down. That’s why I am delighted that the Chancellor has listened, and frozen fuel duty again.’

One thing to watch, on the subject of Robert Halfon, will be the tussle in the few hours between the Lib Dems and certain Tories to claim the decision to raise the personal tax allowance as a victory for their own party.

The Lib Dems have the higher claim: they had it in their manifesto, and Danny Alexander reiterated his desire to go even further with the threshold at the party’s autumn conference. But I suspect that won’t stop Tories like Halfon pointing out cutting taxes for the poor is still a Conservative policy.

14:03: Tracking growth. Even after today’s heavy downgrades, the OBR’s growth forecasts are still more optimistic than the independent average:

13:55: Fraser has found a key difference between the work of Osborne and his predecessor:

Osborne’s budget is the opposite to Brown’s: it looks better on closer inspection. #SmallPrint

— Fraser Nelson (@frasernelson) December 5, 2012

But also praises the tax rises:

Hitting middle class to lift taxes for low paid will have been a tough decision. But given appalling youth unemployment, the right decision.

— Fraser Nelson (@frasernelson) December 5, 2012

13:51: Labour responds. Ed Balls’ response to Osborne was not as finessed as he might have hoped. The Shadow Chancellor managed to fluff his opening, as shown by this video from Guido:

12:37: Isabel’s files in with her thoughts on what the statement means for Labour:

Ever the strategist, Osborne included a number of announcements that are potential flashpoints for Labour in his statement. One that will be particularly effective in 2015 will be the Welfare Uprating Bill, which Labour will probably suffer from internal rows between voter-conscious (Liam Byrne) and more traditional left-wingers. They will battle over whether to back the move from increasing benefits in line with inflation as opposed to increasing benefits by 1 per cent.

Whether the party supports the spending plans for 2015/16, which will include welfare cuts, is another key question for Ed Miliband as he tries to convince voters that he is ready for government.

As Ed Miliband made such a fuss about the decision to cut the 50p rate at the Prime Minister’s Questions before the Statement, he will also face questions on whether Labour would raise the rate again if it was in government.

13:30: The full Autumn Statement document is available to download here.

13:20: Osborne ends by repeating his ‘global race’ line and his support for strivers:

‘Today we’ve helped working people. But I do not want that to distract from the tough economic situation we face in the world. The public know that there are no miracle cures. Just the hard work of dealing with our deficit and ensuring that Britain wins the global race. That work is underway. The deficit is down. Borrowing is down. Jobs are being created. It is a hard road. But we are making progress. And in everything we do, we’re helping those who want to work hard and get on. ‘

13:18: Tax cuts. The Chancellor adds another 1 percentage point to his corporation tax cut. It’ll now drop to 21 per cent in April 2014 instead of 22 per cent. Yet another fuel duty freeze – even more than Labour had called for. They wanted the 3p per litre rise delayed to April. Osborne is cancelling it altogether:

‘That is real help with the cost of living for families as they fill up their cars across the country. And it will help businesses too. It means that under this Government we’ll have had no increase in petrol taxes for nearly two and a half years. In fact they have been cut.’

Osborne extends his adoption of the flagship Lib Dem policy to raise the personal income tax allowance, it’ll now rise to £9,440:

‘Because of the difficult decisions we’ve taken today, we can go even further. From next April, the personal allowance will rise by a further £235 – that means a total increase next year of £1335 – the highest cash increase ever.’

‘This is a direct boost to the incomes of people working hard to provide for their families. That’s £47 extra in cash next year. In total, that’s a £267 cash increase next year.

13:15: Shale. Osborne embraces shale gas, announcing his Gas Strategy including tax incentives and an Office for Unconventional Gas:

‘We don’t want British families and businesses to be left behind as gas prices tumble on the other side of the Atlantic.’

13:13. Global race. Osborne on the favourite Tory talking-point today:

‘Countries like ours risk being out-smarted, out-worked and out-competed by the new emerging economies.’

13:09: Benefits. Instead of going up with inflation (2.2 per cent) working-age benefits will only rise by 1 per cent. Osborne was exploring a freeze, but Clegg vetoed it, so this is a classic coalition compromise:

‘Those working in the public services, who have seen their basic pay frozen, will now see it rise by an average of 1%. A similar approach of a 1 per cent rise should apply to those in receipt of benefits. That’s fair and it will ensure that we have a welfare system that Britain can afford.’

The Chancellor says the lower-than inflation rise in benefits will save £3.7 billion a year by 2015-16. Higher-rate tax threshold will also rise by less than inflation, probably bringing more into 40 per cent rate.

Welfare to rise faster than either earnings of inflation, says Osborne. I wonder how that impacts incentives to work? — Fraser Nelson (@frasernelson) December 5, 2012

13:06: Tax rises. No mansion tax. Osborne says it would be too intrusive and costly to revaluate homes. Instead the tax rise for the wealthy comes in reducing the tax-free allowance for pension contributions from £50,000 to £40,000 and the pot total from £1.5 million to £1.25 million. The Chancellor says this’ll raise £1 billion a year by 2016-17. Osborne repeats his oft-mocked line:

‘But we must show we’re all in this together. When you’re looking for savings, I think it’s fair to look at the tax relief we give to the top 2 per cent.’

13:05: 50p tax. Osborne defends cutting the 50p rate:

‘Punitive tax rates do nothing to raise money, and simply discourage enterprise and investment into Britain. Other countries on our doorstep are trying that approach and are paying the price.” Says when the 50p rate was brought in “tax revenues from the rich fell by £7 billion and the number of people declaring incomes over one million pounds fell by a half. A tax raid on the rich that raises almost no money is a con.’

13:03: Tax avoidance. £77 million more to the HMRC for cracking down:

‘Hundreds of millions of pounds of tax loopholes are being closed with immediate effect, and we are investigating abusive use of partnerships.’ ‘In total, we expect the action we announce today will increase the amount of money collected from tax evasion and avoidance by a further £2 billion a year.’

13:00: Goodbye to PFI. Osborne announces his replacement for PFI: PF2. This has been a big cause for  The Spectator’s 2012 Parliamentarian of the Year Jesse Norman.

12:58: Public investment. Osborne making a boast of his rather late conversion to extra investment for growth:

‘So despite the fiscal challenges we face, public investment as a share of GDP will be higher on average in this Parliament than it was under the last Labour government. It is exactly what a government equipping Britain to compete in the modern global economy should be doing.’

Investment will go to roads, High Speed 2 rail, extending the Northern Line to Battersea, 120,000 new homes, flood defences, ultrafast broadband for cities, £600 million for science, £270 million for education colleges and £1 billion for Michael Gove’s free schools and academies.

12:55: Departmental cuts. A spending review will be announced in the first half of 2013 for departmental spending in 2015-16. Expect this to be a big coalition battleground. Osborne announces where the money for new capital projects will come from:

‘If all departments reduced their spending on administration in line with the best performing departments like Education and Communities and Local Government, then another £1 billion could be saved. If all departments made greater provision of digital services, rationalised their property estates as some have done, then a further £1 billion could be saved. So today, we are reducing departmental resource budgets by 1% next year and 2% in the year after.’

Not all departments are in danger. Some of the protected areas from the extra cuts include the NHS, schools aid, military manpower & core defence equipment and local council budgets.

12:53: Austerity. Osborne announces a further year of austerity, extending to 2018. He also announces that he will stick to his 80:20 split between spending cuts and tax rises into 2015-16.

12:51: Cuts. Osborne decides not to implement big extra cuts to meet his debt target:

‘We have not argued we should chase down a cyclical or temporary deterioration in the economy, particularly one which our own independent body says is largely driven by problems abroad.’

‘Overall, we are not going faster or slower with those plans; the measures I will announce in this Autumn Statement are fiscally neutral across this Parliament.’

12:50: Debt. ‘The point at which debt starts to fall has been delayed by one year, to 2016-17’. That means Osborne is missing his supplementary target. But the Chancellor says he will meet the main fiscal mandate to eliminate the structural current deficit in five years, helped by the rolling target.

12:49: Borrowing. Osborne says we are borrowing £108 billion this year (less than the £122 billion last year) but stripping out the tricks gives more like £120 billion.

12:48: QE. ‘With or without’ the QE transfer the deficit as a % of GDP will fall this year. ‘It is falling and will continue to fall each year’, says Osborne.

12:46: Unemployment. Osborne boasts ‘Britain now has a greater proportion of its people in work than either the eurozone or the United States ‘ and says OBR has revised down its unemployment estimates — a small nugget of good news against the growth downgrades.

12:41: OBR downgrades. Osborne announces that the Office of Budget Responsibility has downgraded growth forecast for 2012 to -0.1 per cent, from +0.8 per cent in March — in line with other economists. The OBR is also downgrading growth to: 1.2 per cent in 2013, 2 per cent in 2014, 2.3 per cent in 2015, 2.7 per cent in 2016 and 2.8 per cent in 2017.

12:38: Jobs. Osborne says there are 1.2 million new private sector jobs, but that must include new definitions and start in Q1 of 2010. He also boasts of low gilt yields, but part of the reason for that is Bank of England’s rock-bottom interest rates and QE in response to weak recovery.

12:35: George Osborne has stood up to begin delivering his autumn statement. The Chancellor claims economy is healing: but get set for OBR downgrades. A nod for US fiscal cliff, to join Eurozone as a main source of worry for the future?

11:55: Prime Minister’s Question Time is about to begin. We’ll be tweeting from the chamber through the Coffee House Twitter account:

Tweets by @Spectator_CH

11:45: Although the announcement from Osborne is 45 minutes away, ‘global race’ is already emerging as the key message from this year’s statement. Isabel blogged earlier on a leaked document intended for Tory ministers with the following lines to follow:

‘Today the Chancellor and Chief Secretary have told Cabinet that they will announce at the Autumn Statement over £5 billion of capital investment to invest in the economy and equip Britain for the global race.

They also informed Cabinet this will be achieved within the Government’s fiscal plans and, in part, be funded by some Government Department’s resource budgets being reduced by 1 per cent in 2013-14 and 2 per cent (£2.5 billion) in 2014-15. Health and Schools remain protected from these reductions.

Funds will be channelled into transport, skills and science. This capital investment will also allow the expansion of existing good schools and the construction of up to 100 new Academies and Free Schools.

The switch at this Autumn Statement follows a similar switch of £5 billion at the last Autumn Statement and an additional £2 billion a year of capital spending announced in the Spending Review.

This means that capital investment as a percentage of GDP in this Parliament will be higher than the average of the Parliaments under Labour.’

Isabel also reports that at the ‘global race’ message was handed out to the lobby:

I’ve just come back from the morning lobby briefing, where we were told that Cabinet met for an hour this morning for the Chancellor to brief his colleagues on the Autumn Statement. Apparently, there was no banging of desks at the end, which is hardly a surprise. Osborne told ministers at the meeting that ‘Britain is on the right track and that we are dealing with our deficit and our debt in a fair way. That means everyone must make a contribution, and that we are equipping Britain to succeed in the global race.’

11:30: Welcome to Coffee House’s live blog for George Osborne’s 2012 Autumn statement. Sebastian Payne and Jonathan Jones will be reporting on the Chancellor’s key announcements as he delivers his speech, while James Forsyth, Isabel Hardman, David Blackburn and Fraser Nelson will be filing live reaction. The schedule for today is roughly as follows:

• 12:00: Prime Minister’s Question Time with David Cameron
• 12:30: George Osborne will deliver his autumn statement
• 13:25: Ed Balls will respond to Osborne’s statement

Please use the comments section below to give us your views on today’s announcements.