Business

Autumn Statement 2013: A better day for the chancellor

  • 4 December 2013
  • From the section Business
Chart showing GDP forecasts

What a difference eight months makes.

Back in March, Chancellor George Osborne was waiting nervously for economic output figures, which could have showed the UK sliding into a triple-dip recession.

The Budget numbers calculated by the Office for Budget Responsibility (OBR) showed that government borrowing had come in for the financial year 2012-13 only marginally lower than the previous year.

But now, on the eve of the Autumn Statement, the picture could hardly be more different.

The triple dip did not happen. The double dip was even revised away after the ONS calculated that output was flat in early 2012 rather than falling, as had first been thought.

As spring turned to summer, the UK economic climate brightened rapidly and independent analysts started revising up their growth forecasts for this year and next.

Rapid improvement

On Thursday the OBR will update its own economic predictions. As a result of healthier economic growth and higher tax revenues, the OBR is likely to adjust down the official forecasts for borrowing.

The rapid improvement in the economic climate has taken most economists by surprise.

In March, the average UK growth forecast, measured by Consensus Economics, was 0.9% for this year and 1.6% for 2014. By November, these had been pushed up sharply to 1.4% and 2.3% respectively.

In April, the International Monetary Fund (IMF) was downgrading its UK forecasts and accusing the chancellor of "playing with fire" with his austerity plans. By October, the IMF had changed tack and revised up its UK outlook more than for any other leading economy.

Bank of England governor Mark Carney was able to tell a media conference in November that the UK was growing faster than any other advanced economy.

Mr Osborne, then, will have cause to feel quietly satisfied by the turn of events in recent months. He has already declared that he has "won the argument" over austerity. But the mood at the Treasury in the days leading up to the Autumn Statement suggests there will be no triumphalism in his speech.

He will stress there is still a job to be done and that the task of ensuring a responsible recovery is not complete.

Chart showing borrowing forecasts

Although the OBR's borrowing forecast for 2013-14 is likely to be revised down from £120bn, perhaps to around £105bn, that figure would still be one of the highest on record. The red ink on the Treasury's balance sheet will be flowing for several years more.

Even with the overall borrowing numbers falling, there is a debate about what the core structural deficit will look like. The structural deficit is the hole remaining in the public finances once the effects of economic recovery, boosting tax revenues and reducing benefit payments, are taken into account.

There may not be much of an improvement in this deficit measure. If so, that will underline the scale of the challenge still facing the government.

The borrowing forecasts will go through to the 2018-19 financial year and so will shed further light on the chancellor's pledge to balance the books by the end of the next parliament if the Conservatives get back into office.

The key year will be 2019-20, just beyond the scope of these forecasts, but the numbers published on Thursday for the previous year will show how much closer the Treasury is to a balanced budget.

Scales balancing money
The chancellor is aiming to run a budget surplus in the next Parliament

Treasury coffers

So, will be there be room for any Autumn Statement giveaways? The chancellor has let it be known that every handout will have to be paid for, in other words he will not use the undershoot on borrowing to fund new spending.

Mr Osborne will want to be seen to be backing business to help the recovery. A cap on the increase in business rates is widely anticipated - it would cost more than £300m next year and how he would pay for it is not yet clear. Another crackdown on tax avoidance may be called upon.

While the public finances have been on an improving trend, one area has fallen short. A much trumpeted deal with the Swiss authorities was supposed to bring in a windfall of £3.2bn after a crackdown on tax avoidance.

It seems likely that less than a third of that sum will now find its way into the Treasury's coffers. The chancellor will have to work out how to plug the gap which will be left in the public finances as a result.

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