George Osborne delivered his riposte today in the face of mounting pressures, but weak growth forecasts look set only to further intensify the pressure on the beleaguered Chancellor.
The Autumn Statement revealed that figures from the Office of Budget Responsibility (OBR) show a significant downgrading of growth over the coming years.
Importantly, for Osborne, they do not predict a recession. Growth has been revised from 1.7% to just 0.9% for 2011, and is set to contract slightly to 0.7% in 2012, before rising to 2.1% in 2013. The OBR suggests that unemployment is set to rise over this period, even accounting for the growth measures stipulated in the report.
Eurozone & Debt
The Chancellor adopted the OBR’s assessment that the Eurozone was a signficant factor in the downgraded growth prediction. Under pressure to defend his defiance of austerity measures, Osborne sought to contextualise the current situation in the UK via the Eurozone.
Without his austerity plan in place, he argued, borrowing would have been high enough to launch the UK into the centre of the Euro debt storm. Prior to the implementation of the cuts package, he stated, the UK government’s interest rates were higher than Italy’s, whereas now they sit even lower than Germany’s. This, according to Osborne, only “makes the case stronger”. The lower interest rates elicited by the government’s austerity package have apparently reduced the cost of servicing debt alone by $22 billion.
However, it could not be masked that the government intends to borrow much more than it had previously announced. Government borrowing is set to fall from £137 billion in 2010/11 to £127 billion in 2011/12, and is set to fall at an increasing rate thereafter. Debt is set to peak at 78% of GDP in 2014/15.
But – crucially for international markets – the proposals in place mean that both of the fiscal mandates set out are still due to be met. The OBR, accounting for a degree of error seen across previous budgets, offered a 60% probability of the government accounting for its structural deficit by the end of the term as predicted.
Pay & Conditions
Public sector pay – provocatively announced the day before a one-day public sector strike – is set to be capped at 1% following the two-year pay freeze currently in place.
Pensions, meanwhile, are protected, and the 5.2% rise guaranteed from the RPI inflation measure in September will mean the largest ever cash rise for pensions in 2012, when inflation is expected to fall. The rise in the pension age to 67 has been brought forward to 2026.
State benefits will also be boosted by the same index, which could lead to a deterioration in the budget depending on the prospects for employment.
The previously announced £40 billion ‘credit easing’ scheme was confirmed by the Chancellor, as well as a separate infrastructure plan. One ambitious measure sees the government pass on low international interest rates to domestic firms. As such, the credibility gained on the global markets – as the government sees it – can now provide credit at lower rates to bolster the economy.
A £5 billion infrastructure scheme was also confirmed. The addition of pension fund investments could add a further £20 billion for public projects. Included within the list of projects is:
- The electrifying of the TransPennine Express rail route between Leeds and Manchester,
- Road access improvements to Manchester Airport,
- Upgrades to major motorways in the South-East and South-West,
- Faster development of the Tyne & Wear Metro,
- An extension of the London Underground’s Northern Line to Battersea.
An extra £1 billion was announced for the Regional Growth Fund in England, and £400 million is to go towards stalled home construction projects where planning permission is already granted.
Plans were announced to make it easier for employers to hire and fire, and 50% income tax relief was offered for start-up investors.
The Treasury have reportedly arranged an allocation system with the Bank of England governor whereby “Quantitative Easing” measures will be distributed to banks as they, in turn, lend outwards.
The Chancellor opposed the European financial transactions tax (the Tobin tax), describing it as a tax on pensions that specifically disadvantaged London. The bank levy was increased, however, to 0.088% – the third such increase made this year.
The Chancellor can be grateful for the OBR’s independent conclusions that the Eurozone has been a considerable factor in the lower growth estimates. Observers and investors, meanwhile, can have confidence in realistic growth predictions that show no sign of artificial augmentation.
As the government reveals more borrowing, we are left to consider whether the severity of cuts has proved a failure, or whether, in fact, the low cost of servicing debt and the confidence in the UK finances relative to the rest of Europe could only have been attained through the current economic path.
Undoubtedly, there are inherent risks to the international markets were the UK to be seen to deviate from the austerity measures in place. Balancing the books remains the one fixed parameter for many eagle-eyed spectators at a time of great uncertainty. Low growth estimates, after all, make it clear that a return to recession is a clear possibility. The one certainty is that the difficult political and economic decisions look set to intensify in the months ahead.
How will you be affected by today’s Autumn Statement? Will you benefit from the postponed petrol duty rise? Could small firms benefit from better business rates? Does the Shadow Chancellor, Ed Balls, provide better alternatives? Drop us a comment here (or at Which4U) and let us know!