Autumn Statement: Fuel Duty Hike Is Scrapped

Autumn Statement's Important Bits

Updated: 3:48pm UK, Wednesday 05 December 2012

By Ed Conway, Economics Editor

The Autumn Statement is what the Treasury likes to call a "fiscal event", the rough translation of which is that although this isn't the kind of tax-and-spend measure-fest we see in the spring Budgets, there are nonetheless plenty of measures to get one's head around.

So here, in roughly descending order of significance, are the key points from today: and their implication for the economy and for families around the UK.

1. The Government will miss its debt target

One of the two fiscal rules George Osborne set himself in 2010 was that by the end of this Parliamentary term (for example, between 2014/15 and 2015/16) total government debt should be falling, as a percentage of gross domestic product. The Office for Budget Responsibility (OBR) said that he is on course to miss this target - that debt will only start falling the year after that.

However, rather than pledging to take action to meet the rule, the Chancellor has, intriguingly, said he will, instead, stick to his existing plans. While some might quibble that his existing plans involved meeting his targets, what this means in practice is that he will not impose extra austerity in the short term purely to meet this target.

It remains to be seen whether the Chancellor will, ultimately, manage to get the public finances back in such a state that he meets this rule. The OBR is, after all, merely making predictions about what will happen in a few years' time.

Nonetheless, the decision to ignore the target, for the time being, is an important one. It took the previous government ten years to miss their fiscal targets. This Chancellor has missed one of his in barely more than two.

The big question now is whether the markets construe this as a blow to the UK's fiscal credibility. The reaction from gilts markets has been relatively muted, with the interest rates charged on Britain's Government debt remaining close to 1.8%.

2. Slashed forecasts, and the threat of a triple dip

The OBR also cut its forecasts for economic growth sharply for this and the coming years. So whereas in March it expected the economy to expand by 0.8%, it now expects a contraction of 0.1%.

On top of this, it's also predicting that GDP - the broadest measure of the country's economic output - will shrink by 0.1% in the final quarter of the year.

Given that the generally-accepted definition of a recession is two successive quarters of contraction, this would put the UK within a whisker of an unprecedented triple-dip, just when it had bounced back from the double-dip earlier this year.

However, it is worth emphasising that the OBR believes it will only be one quarter of contraction, rather than two.

As far as the OBR is concerned (and this is something others are likely to dispute) the main reason for the lower growth is the impact of the euro crisis on the European economy, and the subsequent effect on Britain's trade with the EU.

That fits in with evidence that one of the main drags on GDP in recent quarters was trade - however some have argued that the Government's austerity policies may have been more of a drag on growth than had been previously anticipated.

3. A decade of crisis fiscal policy

This is the first opportunity the Treasury has had to plot its broad fiscal plans into 2017/18, and the upshot is yet another year of austerity.

Given that the crisis first hit in mid-2007 with the collapse of Northern Rock, followed by the Lehman Brothers bankruptcy the following year, it means, in effect, that the post-crisis mopping-up operation will have lasted for at least a decade.

And the scale of the austerity in 2017/18 is not to be sniffed at: combined tax increases and spending cuts of £4.9bn in that year alone.

4. The giveaways

There were, of course, a few Christmas goodies in the Chancellor's bag, and unlike at the Budget most of them - save for extra capital spending - had been kept secret.

The tax-free personal allowance (the amount of salary every Briton can earn before paying any tax on it) will rise to £9,440 from next April - equivalent to an extra £47 of cash.

The Chancellor cancelled (not deferred) the 3p fuel tax rise due in January. And he also cut the main rate of corporation tax by 1 percentage point to 21% in 2014.

In broad terms, this will be a £2.27bn giveaway over this and the next three fiscal years. But that's then followed by a £5.2bn takeaway the following two years.

However, this excludes the effect of the following point.

5. 4G

The auction of the 4G spectrum, for the next generation of mobile phones, is forecast to bring in a whopping £3.5bn - even though it hasn't actually happened yet(!)

This will mean that money effectively flatters this year's fiscal figures, and allows the Government to claim that the overall deficit is coming down this year (rather than rising, as it would if the 4G proceeds were not included).

Some will consider this a fiddle. Although others will recall how much money Gordon Brown made from the 3G auction.

6. Cuts for the rich and the poor

In order to keep the public finances under at least some semblance of control, and to help the Chancellor meet his other fiscal target (more on which below), there will be further cuts and controls on spending.

Welfare bills will be fixed at 1% for three years on working age benefits and tax thresholds, raising an extra £3.5bn by 2015.

But this will be balanced out by measures targeting wealthier households: in particular the tax relief people can claim on pensions will be reduced. The lifetime pension pot will be reduced from £1.5m to £1.25m, while the annual allowance one can put into a pension scheme tax-free will drop from £50,000 to £40,000.

According to the Treasury this will only affect the top 2% of pension pots - so is aimed squarely at the wealthy. Although it isn't as deep a cut as had been expected: some thought the annual allowance would drop to £30,000.

On top of this, as announced on Tuesday, there will be an extra £5bn spent on capital investment projects, including new schools and, in London, the Northern Line extension of the London Underground. These will be paid for by money saved from government departments' budgets.

7. Deficit target met, with or without controversial QE switch

The Chancellor's second borrowing rule is that he needs to balance out the cyclically-adjusted budget (in other words, once you've taken account of the temporary fiscal impact of booms and busts) over five years.

This is a rolling target, rather than the static one incorporated into the debt rule, so it's marginally easier for the Chancellor to meet, provided he commits to tightening his accounts towards the end of that time horizon. And that is indeed what has happened this time around.

The structural deficit will indeed be eliminated within five years, according to the OBR.

This achievement threatened to be overshadowed by what many saw as a suspicious shift in cash from the Bank of England's accounts to the Treasury. The Bank was sitting on about £35bn of profits from its quantitative easing scheme: that now goes across to the Government's accounts.

However, the Treasury would have met his deficit target with or without this accounting change, the Chancellor said.

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