Budgets and mini-Budgets, or Autumn Statements, seem to come around as regularly as buses these days. Last Wednesday, for the fourth time in 12 months, the chancellor, George Osborne, outlined the government’s borrowing and spending plans.
This statement was accompanied by a spending review forecasting cuts to departmental expenditure required to clear the deficit before the end of the parliament.
His statement contained one major surprise: the U-turn on tax credits for low-paid families. Rather than being phased in gradually, the £4.4bn reduction, which was rejected by the House of Lords last month, will be abandoned. The police budget will not be cut, while pensioners will get the biggest increase in the state pension in 15 years.
However, he has clamped down on the buy-to-let market, with stamp duty rising by 3% for buy-to-let and second-home buyers. There will be yet another scheme to help people onto the housing ladder: Help-to-Buy London.
The NHS will get extra cash, while as of April 2017, large businesses will have to pay 0.5% of their pay bill towards an apprenticeship levy. He plans to raise £3bn a year and fund three million apprenticeships. Cuts in departmental budgets will range from 14%-37%. Oh, and we were excited to learn that there is to be a permanent fund for fixing potholes.
It was a “win-win” Autumn Statement, as Michael Sawicki of Lloyds Bank Commercial Banking put it. Osborne is still on track for a planned budget surplus in four years, but has managed to maintain spending at a level higher than expected. The spending cuts pencilled in are now around two-thirds smaller than those proposed by the coalition in March, noted Jonathan Dupont of the Policy Exchange. Borrowing forecasts, meanwhile, have been lowered.
If all that sounds suspciously convenient and too good to be true, it probably is. The improved borrowing forecasts “saved the chancellor’s bacon”, said Capital Economics, giving him the scope to ditch the tax credit cuts but stay on track towards a surplus in 2019-20. The Office for Budget Responsibility has assumed that the borrowing-overshoot of recent months is a temporary phenomenon, while so-called “modelling changes” have improved tax receipts by around £6bn or so per year by the end of the forecast. The more optimistic take on tax receipts has been accompanied by assumptions of lower future interest costs. All told, the public finances are expected to be £27bn better off over the course of this parliament than assumed in July.
In essence, then, said The Times’s Tim Montgomerie on Twitter, “economic policy is now plan G, G for gamble. Osborne has made a massive gamble on continuing growth. Time will tell if it comes off.” In the near term, “the big picture regarding the economy has not changed”, according to Capital Economics. “A big new wave of austerity is still set to hit next year.” But with real wages climbing quickly and continuing to buoy consumption, a significant slowdown is unlikely.
The big picture, however, as The Spectator’s Fraser Nelson pointed out, is that Osborne is reducing overall spending by 3.2% over nine years – less than the cut made by Denis Healey in 1977-78 alone. The other key issue in the short-term is the probable end of the buy-to-let bubble. As we’ve pointed out both online and in the magazine recently, the sector was already starting to look unattractive before the new tax, which is set to crimp demand further at a time when supply is poised to increase.
As far as the wider market is concerned, it’s a pity George Osborne couldn’t resist yet another pointless scheme to artificially boost demand – especially when the London market is cooling off anyway and improving the odds of houses finally starting to become more affordable.