Autumn Statement 2012: What to expect

Autumn Statement composite image

The Chancellor, George Osborne, delivers his Autumn Statement on Wednesday, against the backdrop of an economy still struggling to recover from the longest and deepest recession in generations.

The statement is one of two major statements the Treasury has to give to parliament every year, and has grown in importance during the recent difficult economic times.

Mr Osborne will give his views on the outlook for the UK economy, the state of the public finances and what that means for the government's spending plans and programme of austerity measures.

So what can we expect?

Slower growth

The most keenly awaited news will be the economic forecasts published by the Office for Budget Responsibility (OBR), alongside the chancellor's statement.

It is almost certain to downgrade its forecasts for economic growth. In the Budget in March, the OBR forecast 0.8% growth this year, 2% next year and 3% growth by 2015.

The failure of the economy to recover means that now looks extremely optimistic.

According to the Institute for Fiscal Studies (IFS), most independent forecasters expect the economy to shrink this year, grow by no more than 1% next year, and by 1.5%-2% between 2014 and 2016.

Missing targets

The news will have significant implications for the government's plans to cut the budget deficit, the gap between what it receives in tax revenue and what it spends. In other words, the amount it is in the red every year.

It wants to reduce the amount it has to borrow every year and George Osborne has set himself two targets for this:

1. Eliminating what is termed the structural current deficit over the next five years.

The deficit is reduced by bringing in more tax revenue and/or cutting spending. So as the economy grows and the government receives more tax revenue from expanding businesses and has to pay less out in benefits, the overall deficit will fall.

The structural deficit is the bit of the deficit which is left when the economy recovers.

2. Ensure that total government debt, as a proportion of economic output (GDP), starts to fall by 2015-2016.

The first rule doesn't involve a specific date. The government has pledged to bring down the structural deficit at the end of a rolling five-year period. Because of this, the government added the second rule, with a specific timetable, to try to stop it being accused of kicking the problem down the road.

If the growth figures from the OBR are as bad as many expect, the chancellor could miss his targets. On Sunday, Mr Osborne himself admitted that cutting the deficit is "taking longer" than planned.

According to the IFS, the poor state of the economy means that tax revenues are likely to come in £17bn less than forecast this year, based on current trends, while the size of the budget deficit is set to be £10bn bigger than it was last year, £13bn larger than forecast.

It is worth pointing out that the structural deficit is not a simple calculation. It involves a degree of judgment and a range of assumptions. The OBR will give its view of whether the government is on course to miss its targets on Wednesday, but there is likely to be debate about its findings.

Does it matter if the government misses the targets? Again, that is a matter of debate.

It is potentially politically damaging, as going back on any promise can be for politicians.

But it could also have an economic impact. If missing targets raises concerns about the UK's credit worthiness, it could become more expensive for the government to borrow money.

More austerity

The result is that if the chancellor wants to meet his targets he will need to impose more spending cuts or tax increases, on top of the austerity measures already announced.

Most observers believe the chancellor will announce an extension to the current austerity programme for another year, imposing spending cuts until 2018, in order to meet the first deficit reduction target. The second, to ensure that debt is falling by 2016, is seen as less important.

That would mean more deep cuts to departmental spending, further cuts to the welfare bill, and more tax increases.

Welfare spending is likely to be a major target of cuts. At the Conservative party conference Mr Osborne said he planned to cut £10bn from the welfare bill by 2017, on top of the £18bn of cuts announced in 2010.

One measure he may take in the Autumn Statement is to freeze more benefits, preventing them from rising in line with inflation. Working tax credit and child benefit have already been frozen. Freezing all benefits could save the government £2.5bn a year, according to the IFS.

Cutting pension tax relief is one measure that is being widely anticipated. Currently individuals can put away up to £50,000 a year without being taxed.

There is widespread speculation that this may be cut to £40,000 in the Autumn Statement.

The government estimates that this would save the Treasury £600m a year, while the Standard Life insurance company, suggests a deeper cut to £30,000 a year would save £1.8bn.

Though the sums involved are small compared with the scale of the deficit, the move is also seen as important politically as it targets higher earners.

Speculation over a "mansion tax" has been swirling for months. The Liberal Democrats initially proposed it, suggesting that homes worth more than £2m would pay annual charges, but it was openly rejected by both George Osborne and David Cameron at the Conservative party conference in October.

Since then, Lib Dem business secretary Vince Cable and others have mooted alternatives, including increasing the amount of council tax paid on more expensive properties, or increasing stamp duty on expensive property purchases. But this also seems to have been ruled out by Downing Street.

Further cuts in spending by government departments have already been announced. The government said this week that most departments would be told to cut spending by a further 1% next year and 2% the following year, raising money for building schools and other capital projects.

In a bid to raise more money, Mr Osborne is also expected to announce reforms to the Private Finance Initiative (PFI)), giving taxpayers a bigger stake in new joint investments with the private sector. It is also renegotiating existing agreements to save £2.5bn, according to the BBC's business editor Robert Peston.

Other measures

As well as deficit tackling measures, the chancellor is likely to give details of plans to boost the economy.

Accountancy firm PwC says the chancellors constraints means it is "not expecting any big Christmas giveaways", however it suggests the most likely tax announcement will be a cancellation of the planned 3p rise in fuel duty in January.

Mr Osborne is also is likely to reaffirm his intention to increase the personal tax allowance to £10,000 by April 2015, with a rise in April 2013 already announced. There may also be details on tax avoidance measures.

Reducing tax avoidance has been a regular feature of Mr Osborne's budget statements and we already know that the Treasury will give HMRC an extra £77m to help it track down wealthy individuals and companies who tried to avoid paying tax.

The Treasury said it expected to recoup £2bn a year as a result of the measures announced.

He is expected to flesh out details of a £1bn business bank, after Vince Cable announced plans for it earlier this year, which will focus on lending to small and medium-sized businesses.

The chancellor may also expand on plans to give employees tax free shares in their businesses in return for surrendering certain workplace rights - already announced by Mr Osborne at the party conference.

Reports suggest the gas industry may be a big beneficiary in the Autumn Statement, with the chancellor set to announce approval for 30 new gas-fired power stations.

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