OSBORNE red and blue

When George Osborne rises to the despatch box next Wednesday, he’ll have a lot to get through. There’s not just the usual Autumn Statement, but also a Spending Review that will determine – for the most part – the allowances of Whitehall departments for the next five years. It could all be a bit too much for any sane observer. So, to spare both your senses and your time, I’ve prepared this list of ten things to look out for.

1. Tax credits

Let’s start with the obvious. In his July Budget, Osborne revealed some of the extra £12 billion of welfare savings that he hopes to make in this Parliament, including £4.4 billion worth of cuts to tax credits. Now, just four months later and after one almighty hullaballoo in the Commons, he’ll have to return to those cuts in the Autumn Statement.

The most contentious part of the current plan is how it reduces the earnings threshold at which tax credits are withdrawn from £6,420 to £3,850. Osborne now faces a choice between reversing this policy (at least in part) and compensating for it. According to the Institute for Fiscal Studies’ Andrew Hood, the former could be achieved by, say, only lowering the threshold for new claimants, or by withdrawing the tax credits at a slower pace. The latter could be done by increasing the level at which the low-paid have to pay National Insurance, or by raising the Personal Allowance still further. The Chancellor definitely has options.

The problem is that none of these options come cheap. Osborne can giveth with one hand, but – with the deficit as it is – he might have to taketh away with the other. And there, perhaps, is the impetus for another rebellion. Very few spending cuts are unambiguously popular, particularly when the welfare budget is involved.

2. Tax simplification

The man from the IFS reckons that exempting the low-paid from National Insurance isn’t the most effective of Osborne’s options – but it is the most eye-catching. As I’ve pointed out in one of my To The Point posts, there are about 1.3 million people who don’t pay any Income Tax but who still have to make NICs. Delivering them from this levy, and allowing them to keep more of their hard-earned, would introduce a de facto Living Wage at a stroke.

Besides, it would be a step towards the “alignment” of National Insurance and Income Tax that the Chancellor has mooted for years. First he announced a consultation on the policy in his second Budget speech of the last Parliament. Nothing came of that. Then he announced a full-blown review in his second Budget speech of this year. Something should come of this. It won’t be ready in time for next week, but apparently a report will be published some time before next year’s Budget.

But the Autumn Statement can still be a barometer for Osborne’s mindset. If he does nudge the National Insurance threshold towards the one for Income Tax, it could be his way of backing down over tax credits without really backing down: the message would be that this Government wants to leave you with more of your money in the first place, instead of recycling it back through the wasteful corridors of HMRC. It could also suggest that a proper merger isn’t too far off.

3. Tax thresholds

Might Osborne also do something about thresholds higher up the income scale? You may remember how more and more people were brought into the higher rate of Income Tax during the last Parliament. There were 4.5 million such taxpayers in 2014-15, compared to just 3 million in 2010-11. This became something of a sore point for certain Conservative backbenchers.

The Chancellor has already moved to contain this simmering disquiet. In his last Budget, the higher rate threshold was raised to £43,000, as of April next year, after it had already been raised to £42,700 in March’s Budget. The intention is to bring it to £50,000 in the next five years.

Yet this might not be enough for the backbench brigade. In the New Year, HMRC is set to publish its latest figure for the quantity of higher rate taxpayers, and it’s likely to show an increase from the previous year. The IFS have also said that raising the threshold to £50,000 won’t do anything to prevent the numbers from swelling to over 5 million.

This isn’t to say, much less predict, that Osborne will raise the threshold even higher in the Autumn Statement. But, then again, after the whole tax credit row, he might be more careful about pre-empting trouble, rather than having to respond to it.

4. The deficit, of course

Always, every Budget, every Autumn Statement, the deficit. Osborne currently has two targets that relate to it. The first, a hangover from the Coalition years, is to bring the cyclically adjusted current budget – aka, the structural deficit – into balance “in the third year of the forecast period”. The latest forecasts, which will be updated next week, have him managing this, although by ever decreasing amounts. As the below chart shows, the surplus expected in 2017-18 has shrunk since the March Budget and since the Autumn Statement before that.

151119 Structural deficit

The same goes for the Chancellor’s other deficit target, introduced in July, which is to “achieve a surplus on public sector net borrowing in 2019-20”. Previously, he had been expected to pull it off a year earlier, in 2018-19. The last Budget pushed it back an extra year:

151119 Borrowing

I wouldn’t advise it myself, but perhaps this is how Osborne will relieve his agony over tax credits: continue loosening his fiscal plans, so he doesn’t have to worry as much about finding savings. Or perhaps he will decide the opposite: that he’s already at risk of missing his fiscal targets, so he can’t chance it any further.

5. The debt

There are also two targets related to the national debt. First, that it falls as a proportion of the economy in 2016-17. Second, that it continues to fall in every year up to 2019-20. An’ whaddyaknow? Osborne is happily, conveniently, on course to meet both of these:

151119 Debt

Next week’s forecasts are likely to be unexciting too. I doubt they’ll change very much.

6. Osborne’s fear…

One misconception about Osborne, as I suggested in a recent post, is that he’s confident bordering on arrogant bordering on being an insufferable know-it-all. A pathologically confident Chancellor wouldn’t have changed so much, both visually and politically, in the course of a single Parliament. He wouldn’t have been so ready to recognise the errors of the 2012 Budget and act on them. Yet Osborne did. He knows his limitations.

And he knows the limitations of the economy too. The “no more boom and bust” puffery of Gordon Brown, and the cheery soothsaying of the early Coalition years, has been supplanted by caveats and concerns. I began chronicling them a few years ago. They really began with Osborne’s statement to the International Monetary Fund, on the “risks to the recovery,” in 2012. Back then, it was Europe he’d warn about. Then it became the prospect of America careering off a fiscal cliff. More recently, and despite the globetrotting photo-ops, he hasn’t sounded entirely sure about China and other Asian markets.

Next week’s Autumn Statement will be the first budget document since the Chinese panic of the summer. Will Osborne mention it in his speech? What about the underdevelopment of developing countries? The instability in the Middle East? It could indicate the scale and nature of his fears for our own economy.

7. …and the fan charts behind it.

Osborne’s fears will be underpinned by the Office for Budget Responsibility’s working. Their supplementary documentation is always where most of the action – and, indeed, pessimism – is. This is in no small part due to the fan charts it contains. These don’t just provide the central economic and fiscal forecasts that cross over into the Autumn Statement, but also a spread of other scenarios from the best case to the worst. They reflect uncertainty. As I’ve said before, I wish that Westminster displayed a bit more fan chart-style thinking sometimes; a readiness to expect the unexpected, and to legislate for it.

8. Resource and capital spending

Departmental budgets are split in two. There’s the resource spending that goes towards everyday needs, such as staff, electricity and pens. And there’s the capital spending that is invested in fixed assets. I tried to explain the difference between the two in a To The Point post last week.

It’s not a meaningless divide. Both are treated differently in the Spending Review; a department could have its resource budget cut and its capital budget increased, or vice versa, or some other combination. In this way, the Treasury controls not just the quantity of a department’s spending, but also its quality.

And what will the Treasury decide? We already know the overall split between resource and capital spending, or close enough. As the IFS (yes, them again) put it in one of their fantastic briefing notes:

“The plans set out by the Chancellor in the July 2015 Budget imply that departmental spending is to be cut by £11.3 billion (3.2 per cent) in real terms between 2015–16 and 2019–20. Within that, capital (investment) spending is planned to increase by £4.9 billion (11.5 per cent) while resource (non-investment) spending is planned to be cut by £16.2 billion (5.1 per cent).”

Which is to say, capital spending gets all the breaks.

This continues one of the most significant fiscal developments of the last Parliament. At its start, Osborne matched the severe cuts to capital spending that Alistair Darling had imposed. But eventually, at the insistence of Lib Dem ministers, and then of his own volition, he began to regard this as a mistake. Capital spending could hasten his “march of the makers”. It could leave the country with new roads and lines and bridges. It could build a Northern Powerhouse.

So this happened:

151119 Capital spending

Osborne decided to increase capital spending. It will keep on increasing throughout this Parliament.

Which must be heartening for those departments with large, or proportionally large, capital budgets. One of these – Transport – has already agreed to 30 per cent cuts to its resource budget. Its overall settlement, with capital included, won’t be nearly as severe.

9. Security

The Home Office and the Ministry of Defence are still thought to be negotiating with the Treasury. I wonder whether the tenor of those discussions has changed since the atrocities in Paris last Friday. As it stood, Theresa May might have expected her budget to be cut by around a quarter, like it was in the last Parliament; whilst Michael Fallon was in line for small real-terms rises. But are their responsibilities now greater, more daunting, than they were even just a week ago?

It’s no answer, although it is telling that a document has been leaked to the BBC warning of “the impact further reductions in police force numbers would have on our ability to manage terrorist incidents of this magnitude”. This is going to be one of the most fraught debates around the Spending Review.

10. Additional sources of revenue  

As always, a heap of cash would solve many of Osborne’s problems. He could wire some of it across to Theresa; use a bit to reverse the tax credit cuts; build triumphal arches in the north; and so on and so on.

Except cash is rather hard to come by nowadays. There’s the option I’ve already mentioned, of loosening fiscal policy and spending the slack, although I wouldn’t advocate that. There’s the possibility that departments could find more savings, although the moment may have passed. And then… well, what about privatisation?

The Times reports (£) that Network Rail could be hawked to the highest bidder. Channel 4 has been mentioned too. And I’m sure there must be some bank shares knocking around the Treasury somewhere. Never mind Sid – tell George.

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