THERE’S light at last at the end of the tunnel.
For the first time since taking office in May 2010, Chancellor George Osborne will be able to present in the Autumn Statement, a week on Thursday, a set of figures on the sunny side of dire.
Who could forgive him the joy of a fruit-machine player who, after piling in coins year after year with no payout, suddenly finds the machine displaying four lemons in a row to the sound of clattering coins cascading on to the payout tray?
The public finances are better than expected. The deficit is heading down. The economic forecasts for 2014 are looking good. And he can claim to have won the austerity argument. Who, given all this, would care to point out that on closer inspection some of the lemons might be a tad green and under-ripe?
Hot speculation already abounds over what tax-cutting goodies we can expect the Chancellor to trail next week. And it is in the upcoming Budget next spring that the Chancellor needs to act if he wants to support the recovery and raise his party’s election fortunes – so far it has failed to make a dent in the Labour opinion poll lead, despite all the evidence of recovery.
At the rate of reduction indicated in the figures on the public finances last week – a deficit of £8.1 billion in October, down from £8.3bn a year earlier and a cumulative £5.8bn down on the year so far – the underlying Public Sector Borrowing Requirement for 2013-2014 as a whole should come down to £105bn. This compares with an outturn of £115bn for last year and existing official forecasts of £120bn (7.5 per cent of GDP).
And if the current pick-up in the economy is sustained through to next April, even this figure could come down towards £100bn – leaving Osborne with some £20bn to the good – wriggle room the size of a barn door.
All this is in defiance of official forecasts made as recently as this year’s Budget. Indeed, the outturn has confounded even independent forecasters. All are now rapidly adjusting their growth estimates for 2014 upwards towards 3 per cent. And the better outlook for the economy points to further big reductions in the budget deficit for the period ahead.
Little wonder all this has raised expectations that Osborne will use the Autumn Statement to signal some big Budget giveaways. I am not so sure about this. Households and businesses alike need to be realistic. His mantra for years has been that he will not be deflected from his prime goal of driving down the budget deficit as a share of GDP and halting the relentless rise in our £1 trillion plus net debt. I suspect his statement will contain a clear reminder that deficit reduction remains his central concern. This is particularly the case given that total net public debt has risen to £1.207 trillion. It now stands at 75.4 per cent of GDP, the highest percentage ever recorded for the month of October.
And in any event, he will want to save the maximum political impact for next year.
There are, of course, some measures he will announce, to help the SME sector and to spike Labour guns over its proposal for a temporary cut in household energy bills.
Martin Bell, tax partner at business advisory and accountancy group BDO in Scotland, says an employers’ National Insurance rebate or holiday should be top of the list. Recent surveys have indicated that a reduction in employers’ national insurance is the number one recommendation from businesses to encourage them to take on new workers. The March Budget announced the removal of the first £2,000 off employers’ NI contributions. Osborne called this move “the largest tax cut in the Budget”, exempting some 450,000 SMEs from paying any employer NI at all. This is due to take effect next year and the Autumn Statement may thus contain a forceful reminder of what’s in the pipeline.
Also high on the list of probables is a one-off windfall tax on the energy giants which would be popular with voters. It would help alleviate the “cost of living crisis” which has prevented households from feeling any benefits from the recovery.
But overall, there are reasons for Osborne to proceed with some caution. His row of winning lemons is not as healthy as he would like.
First, the fall in the deficit in October was not as large as most were expecting. The consensus expectation was a fall to £7.5bn, rather more than the £8.1bn announced. The figure did not include any contribution from the Royal Mail share sale (though there was a perverse £300m addition reflecting the cost of shares to Royal Mail staff). But receipts were helped by higher Stamp Duty receipts, reflecting a rising level of transactions in the property market. As David Kern, chief economist at the British Chambers of Commerce, pointed out: “While improvements may be partly down to the faster rate of economic growth, the pace of [deficit] reduction remains modest. Corporation tax receipts were lower than at the same point in 2012, and the job of repairing our public finances is still a major challenge.”
All things considered, underlying revenue growth excluding exceptionals is running barely 1 per cent above the Office of Budget Responsibility’s forecast. Moreover, some of this is due to special factors which may unwind. And with the full boost from economic recovery still to feed through, the Treasury cannot be certain that the previous relationship between growth and extra revenue generation still applies.
The absence of a £2.3bn contribution to deficit reduction from the Royal Mail share sale conformed to a European convention that the sale was just a switch of assets from equities to cash. The worry for the Chancellor is that it effectively blocks him from using other sales of state assets to reduce the main measures of borrowing.
Nevertheless, we are on course for the most upbeat Budget statement in four years. And that in itself may help to boost a much-needed “feel-good factor” for households and businesses alike.