Autumn Statement: What has changed?

 
The Autumn Statement Did the chancellor have more room to manoeuvre

What has changed as a result of this Autumn Statement? The answer is nearly everything about Britain's economic and fiscal situation has changed, though not as dramatically as it did in the last one.

The only thing that hasn't really altered is George Osborne's basic approach. He's just halved the number of fiscal rules that he is going to abide by - from two to one.

For economists, the key change is to the Office for Budget Responsibility's (OBR) assessment of the economy, which I mentioned earlier.

Though it is more optimistic about the immediate room for growth, the OBR has revised down its growth forecasts for the next few years, and once again deferred the time at which we will get back to our long-term potential growth rate, which they now think will not happen until 2016.

The more transparent treatment of the net gains to the Treasury from quantitative easing make the picture brighter, but the underlying deterioration is there.

Grim years

For the ratings agencies, the OBR's re-assessment of growth is important, but also key is Mr Osborne's abandonment of his promise to have the debt ratio falling by 2015-16.

Fitch said after Mr Osborne's announcement that the government's policy framework had been a key factor helping the UK to hold on to to its top AAA credit rating, and the loss of the debt rule had weakened both the coalition's credibility and the rating.

What will everyone else take away from Wednesday's announcements? Behavioural economists say it's human nature to notice concrete losses more than gains forgone.

That might help the chancellor when it comes to some of the measures he has announced. But he can't get away from the fact that it's going to be a grim few years - a grim few years that he has decided he is powerless to confront.

Some businesses might see an absolute fall in what they pay in corporation tax in 2014. Or they will find, with the help of Mr Osborne's new £2bn investment tax allowance, that they can invest more cheaply than they did before.

The same is true of the individuals affected by the increase in the personal allowance - which, incidentally, the OBR says has put the government on course to achieve at least one of its targets. From now on Mr Osborne only need to increase it in line with inflation, in the usual way, for it to get to £10,000 by 2015-16.

So, these companies and individuals could well see a cash gain, as a result of the new measures.

It's true and important to note that many working households will see that gain offset, in reality, by the below inflation rise in tax credits. But tax credits will still go up, on the new plans. So will public sector pay. They just won't go up as fast as inflation.

In other words, a lot of the losers from today's measures are "real terms" losers, but they will not find that cash is being taken out of their pockets that they have now.

Politicians have been pilloried for drawing such a distinction in the past. Anyone concerned about the day to day needs of lower income households - and, indeed, most economists - would not think that it matters. However you cut it, these families are worse off than under previous plans. But for politicians and quite a lot of households, the difference between cash losses and real terms losses is, er, real.

Many of the benefit changes introduced since 2010 have or soon will cut households' income in cash terms. The changes to housing benefit and the benefit cap are the most obvious examples, or the removal of child benefit from higher income families.

By and large, the benefit and tax changes announced on Wednesday will not do that, though that will be cold comfort for the 400,000 extra people who will now hit the higher rate income tax threshold in 2014.

But, however those losses are ultimately perceived, it's probably not Mr Osborne that has done most damage to the prospects of ordinary households this week. It's the economy - or at least, the economy as viewed by the OBR.

As the Resolution Foundation points out, in its forecasts the OBR has once again put off the date at which average earnings will start to keep up with inflation, from the second quarter of next year until the second quarter of 2014.

At that point the median full-time wage will be 7.4% lower than it was in 2008 level. The Foundation reckons that the wages of someone in the middle of the income distribution in 2017 will still be lower than in 2000.

Positive difference

As I predicted earlier in the week, the OBR has given him this bad news, but it has also given the Chancellor a good alibi: it says the basic deterioration in Britain's economic health since 2010 is not his fault.

That is extremely helpful politically but it does raise the risk that he will seem to be the prisoner of events - holding on to his plans and the OBR's justifications, as the economic picture gets steadily worse.

As it happens, the OBR does think Mr Osborne made a positive difference to the economy with Wednesday's announcements. On balance, it thinks the chancellor has boosted growth between now and 2015 by 0.1%.

Apparently, Mr Osborne believed that this was the most he could do, without damaging the UK's credibility in ways that could ultimately do more harm than good. (I say apparently, because if he thought he could do more, you have to assume he would have done it.)

We will literally never know whether the chancellor was right to think his room for manoeuvre in the winter of 2012 was this small. That is one question the OBR is never going to answer.

 
Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this
    +2

    Comment number 141.

    133.
    treacle_01

    other ideas...

    -National Maximum Wage.
    -Re-nationalisation of the natural monopolies (incl. rail, utilities, water, road)
    -getting the people back to work.
    -fixing the pension/annuity problem (savings provide a pension that does not require topping up by the state.)
    - etc
    etc.

    Not just one idea then!

    A complete integrated political philosophy!

  • rate this
    0

    Comment number 140.

    Benefits are increasing at 1% a year for the next few years? As somebody who chose not to have children, gets no assistance with housing and hasn't seen an increase in salary in line with inflation for many years my heart bleeds.

  • rate this
    +1

    Comment number 139.

    137. dr g " without the kind of Armageddon JfH espouses"

    (I don't like Armageddon), but the choice is many decades of the economy being slowly strangled, with several generations of people not working or getting it over with quickly.

    Do you go to the dentist and tell him/her to pull a tooth slowly?

  • rate this
    0

    Comment number 138.

    We are forever going on about the Deficit, a paltry £70something Billion. Does anyone have clue as to what we intend to do with the £1.2 trillion debt mountain we have - can we sell Scotland to the Scots to pay it off?

  • rate this
    +2

    Comment number 137.

    131 + 130 I think you're both correct. Massive demand for housing coupled with poor credit control allowed ridiculous house price boom. This has led to debt slavery for millions and damaged UK plc competitiveness. The trick is how to halve house prices without the kind of Armageddon JfH espouses? If we can drop housing costs we can get rid of in work poverty.

  • rate this
    0

    Comment number 136.

    tax avoidance.. excess of £150B"

    This is simply mythical. However, even if it was true significantly higher real levels of taxation would impact seriously econ activity reducing growth & driving business away from UK. It is not a free lunch. UK is already hugely over taxed when compared with dynamic economies of Asia; if you want to make it worse merely raise real levels of taxation.

  • rate this
    +2

    Comment number 135.

    I hope the US Congress - both Republicans and Democrats - are paying attention to the UK's economic situation. Austerity may bring down the deficit, at least over the longer term, but at what cost in terms of economic uncertainty and human misery? If the US slips over the 'fiscal cliff' - and is not quickly remedied - its economy will almost certainly slide back into recession; unnecessarily.

  • rate this
    +2

    Comment number 134.

    Osborne is pretending most benefits are paid to feckless "scivers" rather than low paid workers which is the truth


    The fact is that if all benefit abuse from non workers could be removed over the next 3 years the saving would amount to £ 3-6 Billion.

    If all personal and corporate tax avoidance was prevented the additional income for the exchequer would be in excess of £150 Billion

  • rate this
    +1

    Comment number 133.

    @129.jordanc

    John_from_Hendon
    has no clue
    ---
    He is a bit of a one idea man.

    Not to say that he might be right, though.

  • rate this
    0

    Comment number 132.

    124 Though I believe that number goes up as Gvt borrowing rates fall since they are notional based on assumed amount requiring to be invested to generate the defined benefit (so far as the pension bits relate). So whilst private sector annuity rates have fallen in money purchase schemes - the public sector liability increases on defined benefits as a result.

  • rate this
    +2

    Comment number 131.

    130. "7/8 times salary has now led to overpriced houses"

    No, the inflation in house prices has been due primarily to demand outstripping supply. Supply is constrained bec of tight restrictions on the release of land & on incredibly restrictive planning law. Damand has incr for existing stock bec of popn growth & fall in average h/hold occupancy rates.

  • rate this
    +1

    Comment number 130.

    BR to low - should have remained above 5% re the period from the war to 1999

    Reducing it below 5% and allowing bank to lend at 7/8 times salary has now led to overpriced houses which need to fall in price so that recovery can happen

  • rate this
    0

    Comment number 129.

    John_from_Hendon
    has no clue

  • rate this
    +2

    Comment number 128.

    Osbourne and co. have no credibility.

  • rate this
    +2

    Comment number 127.

    #113 It is the clear that the welfare system is not working, it does not deliver enough to those who should be protected, is overcomplicated and pays too many people unnecessarily.

    Secondly, govt spending needs to be radically cut. On average govt gets 35% of GDP in taxes (50 year average), in good times it needs to spend no more than that (not 40%+ which was Lab policy)

  • rate this
    +1

    Comment number 126.

    53.Saasfe52 "unfortunately house indebtedness would lead to repossessions and wore welfare"

    Prices need to fall so that recovery can happen. Also i think you over estimate the number of repossessions.

    maybe the debt junkies - the ones that overstreched at buying 2004-2007

    maybe the ones who bought prioe then used their homes as cash point machines

  • rate this
    +2

    Comment number 125.

    Amazing how many fans of Neo Liberal economics think that you can a capitalist economy without debt....

    ....talk about the elephant in the room.....

    ....study your economic history people....

    ....capitalism & credit/debt are utterly intertwined.....

  • rate this
    0

    Comment number 124.

    123 Somewhere bewteen £3 and £4 trillion according to Philip Booth at the IEA.

  • rate this
    +2

    Comment number 123.

    We're broke. If we include PPI commitments and unfunded (public sector) pension liabilities we're as good as finished. And I'm not trying to sound dramatic it really is that bad, as it is across the developed world. If you understand the full picture there is nothing that the Government, or Labour, will do that can possibly get us out of this mess.

  • rate this
    -2

    Comment number 122.

    50,

    I would say yes - higher rates - more savings - more money to bank cofers so that they can then lend again

 

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