• Text size      
  • Send this article to a friend
  • Print this article

Chancellor on a rocky road

IN presentational terms, George Osborne's Autumn Statement yesterday can be counted a success.

There were no obvious elephant traps such as the "granny tax" or the "pasty tax" hidden in the undergrowth of the Chancellor's text. And, though he was in no danger of being mistaken for Good King Wenceslas, there was some good cheer on offer.

The twice-postponed 3p rise in fuel duty was cancelled (though the Government still takes around 80p from every litre of petrol sold). By 2014 Corporation tax will be 21%, one of the lowest levels anywhere and businesses will be able to offset up to £250,000 in new equipment against tax. The income tax threshold will rise by an extra £235 next year, bringing it to £9,440, within spitting distance of the Coalition's £10,000 target. This means millions of poorer households will be lifted out of tax. Simultaneously, 2500 new inspectors will crack down on high-end tax avoidance (though this follows some 10,000 redundancies at HMRC).

Rather than Santa, Mr Osborne presented himself as a character more akin to Christian in John Bunyan's Pilgrim's Progress, plodding a lonely track towards the wicket gate entrance to paradise, despite temptations to turn aside or take "the road to ruin" (aka more borrowing). As he put it: "The road is hard but we cannot relax our efforts."

But the Chancellor has a problem. The Celestial City keeps moving further away and there is little evidence that he is on the right route. The Government's own Office for Budget Responsibility (OBR) predicts he will miss his target of beginning to shrink the national debt by 2015. His other target, the so-called fiscal mandate – getting rid of the structural deficit over five years – is achievable, according to the OBR but at least three one-off factors complicate the calculation. Respected analysts, such as the Institute for Fiscal Studies (IFS), reckon the gap between government income and expenditure is actually getting wider. If so, Mr Osborne looks set to fail by both of his own measurements.

In the past 30 months, it is the IFS forecasts that have been closer to the mark, while the OBR has constantly over-estimated future growth. Yesterday the OBR was forced to downgrade next year's figures again. Now it is predicting an almost flat 1.2% growth, well short of what is needed to prompt employers to take on more labour.

Job creation remains the central challenge. Mr Osborne routinely repeats that more than one million jobs have been created under the Coalition. The problem is that good-quality, full-time work is being replaced by low-paid, short-term part-time employment, leaving up to four million people underemployed, while long-term unemployment continues to rise and welfare to work schemes founder. This has dire consequences for both the tax take and the welfare bill.

The £5bn for infrastructure investment (of which around £500m will come to Scotland) should offer a welcome jobs boost, provided "spade-ready projects" live up to their name. However, there is an element of robbing Peter to pay Paul because the money comes from cutting departmental budgets. Such "efficiency savings" can be achieved only by cutting yet more civil service jobs.

Another of Mr Osborne's mantras is about "fairness". It comes in two parts: the rich "paying their fair share" and the need to favour "strivers over skivers". On the first, the Chancellor avoided the LibDems' politically expensive "mansion tax" and plumped for a well-trailed cut in tax relief on pension contributions. Also, the ceiling for the 40% tax rate fails to rise with inflation. At the bottom, though the state retirement pension is protected, other benefits will rise by just 1% for the next three years, while inflation is running at 2.7%. So jobseekers' allowance will rise by around 70p next April instead of £1.56.

These changes fail the fairness test in at least three ways. First, proportionately the poorest 20% will lose more than the richest 20%. Secondly, cuts for the wealthy, with plenty of disposable income, cannot be compared with cuts for the poorest, who are already having to make desperate choices, such a warm radiator or a hot meal. Thirdly, as Shadow Chancellor Ed Balls observed, Osborne rhetoric about the striver leaving for work while his claimant neighbour is "still asleep, living a life on benefits" is grossly misplaced for one simple reason: more than 50% of those who will be hit by the 1% cap are low-paid workers, reliant on housing benefit and tax credits to top up inadequate wages. Unless earnings disregards are increased, these "hard-working families" risk losing more than they gain from the increase in income tax thresholds. Meanwhile, food banks for the destitute are one of the biggest growth areas in the economy.

In essence, the Coalition has opted to extend its austerity plans until 2017 to 2018, halfway through the next parliament, to keep its deficit-cutting plan on track. Part of the rationale has been to preserve the UK's AAA credit-rating, which enables the Government to borrow cheaply but, with the prospect of the economy bumping along the bottom for years to come, that totemic rating could now be in danger.

Mr Osborne was quick to blame the eurozone crisis and rising world commodity prices for knocking growth forecasts off track. There is some truth in that. However, all economies have suffered from these factors and yet the British recession has been longer and the recovery slower than practically everywhere else. Of the G7, only Italy has grown more slowly. Britain's economy is still 3% smaller than in early 2008.

Were it not for the £3.5bn proceeds from the sale of the 4G broadband spectrum, these figures would look worse. That windfall will give the Chancellor some cash to splash prior to the next General Election. Meanwhile, half through the Coalition's term, it has cut £60bn from government spending and has virtually nothing to show for it. If this is a successful economic policy, as Mr Osborne claims, it would be interesting to see how he would define failure. When will he realise that he is on the wrong road?

Contextual targeting label: 
Local government

Commenting & Moderation

We moderate all comments on HeraldScotland on either a pre-moderated or post-moderated basis.
If you're a relatively new user then your comments will be reviewed before publication and if we know you well and trust you then your comments will be subject to moderation only if other users or the moderators believe you've broken the rules

Moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours. Please be patient if your posts are not approved instantly.

129206