George Osborne forced into U-turn over tax credits

George Osborne leaves the Treasury in London. Picture: Getty
George Osborne leaves the Treasury in London. Picture: Getty
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George Osborne yesterday bowed to political pressure and abandoned his plans to cut tax credits, sparing millions of low-paid workers from having their benefits reduced next year.

His change of policy was announced in an Autumn Statement and Spending Review, which also saw Mr Osborne highlight plummeting North Sea oil revenues, saying they would have had a disastrous effect on an independent Scotland.

The Chancellor cited new Office for Budget Responsibilty (OBR) figures showing oil revenue forecasts have fallen by 94 per cent, adding that if Scotland had voted Yes last year, Scottish ministers would have had to make “catastrophic cuts” to public services.

Claiming the Autumn Statement provided economic and national security for the UK, he maintained that the UK would be a country that “lives within its means”.

He stuck by his target to bring the public finances into surplus by 2020 by slashing spending by £20bn over that period.

Citing forecasts of improved growth produced by the OBR, Mr Osborne claimed the UK would move into the black in 2019/20 with a slightly higher than expected surplus.

Public sector net borrowing is set to stand at £73.5bn this year. Thereafter borrowing is set to fall to £49.9bn in 2016/17, £24.8bn in 2017/18, £4.6bn in 2018/19, before reaching a £10.1bn surplus in 2019/20, retaining a positive balance sheet in 2020/21 with a £14.7bn surplus.

Despite his concession on tax credits, Mr Osborne said he intended to keep to his plan to cut £12bn from the benefit bill.

Officials explained he had been given room to manoeuvre on tax credits because improved forecasts gave the Chancellor an extra £27bn to play with over the five-year period of the Spendthe Spending Review. The cash would be generated by improving tax receipts and a fall in the cost of servicing national debt.

Abandoning tax credit cuts will see the UK Government break through the cap on welfare spending it imposed in the 2014 Budget.

The cap will be breached in the next three financial years before welfare spending falls back into line.

To Conservative cheers, Mr Osborne told the Commons: “I’ve had representations that these changes to tax credits should be phased in.

“I’ve listened to the concerns. I hear and understand them.

“And because I’ve been able to announce today an improvement in the public finances, the simplest thing to do is not to phase these changes in, but to avoid them altogether.”

Opposition parties claimed they had pressurised the Chancellor into taking the action.

The savings required to bring the country back into the black will see Whitehall departments face real-terms cuts averaging 3.3 per cent over the five-year Spending Review period. But given that areas such as the NHS, schools, defence and aid are all protected from cuts, the average reduction in day-to-day spending is a more daunting 19 per cent, with transport (37 per cent), communities (29 per cent) and the Treasury (24 per cent) worst hit.

Last night there were also warnings from the Scottish Government that the Scottish budget will see a six per cent cut to public service budgets.

In the wake of the Paris attacks, Mr Osborne announced a 30 per cent increase in the counter-terrorism budget.

He also pledged that the police budget in England and Wales would be protected, contrary to speculation that it would be cut.

The counter-terrorism measures will see £0.5bn invested to help police pursue terrorists and counter “poisonous ideologies” and ensure Britain is properly prepared in the event of an attack.

Security and intelligence agencies counter-terror operations are also set to be boosted by £1.4bn.

The defence budget will see an increase of more than three per cent over the course of the Parliament.

Spending is set to rise from £34.3bn in 2015-16 to £38.1bn in 2019-20, according to the Treasury Blue Book, to cover the costs of implementing the Strategic Defence and Security Review (SDSR) earlier this week.

It includes an investment of £2bn in special forces and £1.2bn to ensure the first of the Royal Navy’s new aircraft carriers has a full complement of F-35 joint strike fighters from 2023.

It will also enable the MoD to replace the Nimrod maritime patrol aircraft which was scrapped in the last SDSR and to go ahead with the renewal of the submarine fleet which carries the UK’s Trident nuclear deterrent.

Overseas aid spending will increase in line with the Government’s commitment to spend 0.7 per cent of national income on aid.

The Department for International Development’s budget will rise from £11.1bn in 2015-16 (including £1.2bn of cross-government funding) to £14.2bn in 2019-20, with £3.1bn of cross-government funding.

Other eye-catching policies included a three per cent rise in stamp duty on buy-to-let and second homes south of the Border.

Mr Osborne said the measure would help working people get on the housing ladder alongside a trailed house-building programme.

The tax increase is expected to bring in nearly £1bn per year and may have a knock-on effect in Scotland if people in England decide to buy second homes north of the Border in a bid to avoid the payment.

Employers will also be hit by a new 0.5 per cent “apprenticeship levy” that will raise £3bn per year.

Basic state pension is to rise by £3.35 next year to £119.30 a week.

The Spending Review creates a “social care precept” to give local authorities south of the Border who are responsible for social care the ability to raise new funding to spend exclusively on adult social care. The precept will work by giving local authorities the flexibility to raise council tax in their area by up to two per cent above the existing threshold.

If all local authorities use this to its maximum effect it could help raise nearly £2bn a year by 2019.

Buried in the Chancellor’s document was a proposal to cut short money – the public money received by opposition parties – by 19 per cent – a measure that will have a significant impact on the finances of Labour and the SNP, who currently receive around £6.2 million and £1.2m respectively.

The Shadow Chancellor John McDonnell said: “Today the Chancellor has been forced into a U-turn on his tax credit cuts, and I congratulate the members on both sides of the House who have made that happen.

“I congratulate the members in the other House as well. I am glad that the Chancellor has listened to Labour, and has seen sense.

“As ever with this Chancellor, however, we await further clarification of the details.”