The Autumn Statement was a breath fresh air for many, with a much softer tone and renewed emphasis on an inclusive Britain. This was partially due to an early Christmas present from the Office for Budget Responsibility (OBR) in the form of a significant upward revision of public finances to the tune of £27bn, stemming from higher expectations of tax revenue and lower interest payments on public debt.
But we should be under no illusions. As the Chancellor himself tirelessly points out, austerity is still with us, and will remain with us until just before the next general election, albeit in a more palatable form.
The big U-turn on tax credits was unexpected and the promised £12bn in welfare cuts was nowhere to be found but let’s not underestimate the Chancellor’s resolve to reach his targets of a £10bn budget surplus by 2019-20 and a reduction of public debt to 71.3% of GDP by 2020-21. These will be achieved through further cuts to unprotected departmental spending with a focus on cuts to public administration as opposed to ‘front line’ services and a higher tax burden.
It was interesting to see how some of the more significant tax increases were linked to a particular cause such as the Apprenticeship Levy on businesses (with an allowance to exempt small businesses) and the provision for local authorities to raise council tax to help fund spending on social care.
Apart from greater flexibility on council tax, the devolution theme was present in other changes for example local government will be allowed to keep all cash generated from asset sales and keep the business rates they collect. This should help foster accountability within local government and provide local leaders with both the incentive to support local businesses as well as the tools to attract more business to their region. With the prospect of less resources coming from central government, this opportunity to raise money for local investment may need to be taken up.
Investment announcements were not reserved for the North, but extended across the UK. There was some additional money for the Northern Powerhouse, with the majority of investment concentrated on improving the transport infrastructure. This was balanced by £11bn support for transport investment in London, £7.2bn investment in transport in the South West and further investment in other regions.
So what could go wrong? The OBR’s projections for the UK economy, which underpin their public finance forecasts and allow the Chancellor to be more generous while keeping to his fiscal resolve, are in line with what most economists expect for the next few years but they assume that an economic growth rate around the long term trend will last throughout this parliament. While no negative shocks are currently on the horizon, one cannot rule them out. Equally, pressing spending needs may also arise as this parliamentary term progresses.
This could be why the Chancellor was keen to hang on to his treasured target of £10bn surplus before the next election. It should give him some wiggle room in the years to come but still allow him to go to the next election claiming victory over the deficit without too many skeletons in hand.