DESPITE higher short-term borrowing, the chancellor presented an Autumn Statement in which the deficit is back on track over the medium term and a surplus is achieved by the end of the next Parliament. At the same time, he announced some selective tax reductions aimed at helping individuals and smaller businesses, while making commitments earlier in the week to higher spending on the NHS and on infrastructure. So how did he do it?
On the public finances, the short-term news was not as bad as some had feared. Borrowing is still coming down relative to last year, but not by as much as hoped for in the March Budget. There is an over-run of £5bn in borrowing this year and £8bn next year relative to the Budget forecast, but this is less than 1 per cent of the government’s total budgeted expenditure. It leaves the chancellor with a deficit of around 5 per cent of GDP, a great improvement on the deficit of over 10 per cent of GDP in the year before the coalition government took office.
Looking further out, the chancellor is relying on continuing economic growth and restraint of the public spending totals. Though growth is projected to subside from 3 per cent this year to 2-2.5 per cent in future years, this is still reasonably healthy for the “new normal” economic world we find ourselves in after the financial crisis. However, public spending will need to be restrained tightly over the course of the next Parliament – which may yet require a more radical rethink of the scope and delivery of public services and the benefit system.
Another helpful factor for the chancellor has been a reduction in debt interest. With low inflation and worries about the health of the global economy, government borrowing costs have come down since the Budget. This helps the chancellor meet his borrowing targets without having to announce further major cuts in public spending programmes.
The infrastructure announcements before the Autumn Statement are welcome – particularly the upgrading of the road network, which provides vital arteries for business and trade, and hence economic growth. But much of this extra capital spending had already been allocated in previous Autumn Statements and Budgets. In addition, there must still remain a worry whether these infrastructure plans can be delivered in the face of many planning and environmental constraints.
The chancellor was able to find some money for modest tax giveaways to help low earners – through a further rise in the personal allowance – and smaller businesses. He also reformed stamp duty so that there will be less duty on most house transactions – with the exception of the very largest properties. But he has recouped lost revenue with new restrictions on the tax allowances and reliefs available to banks and other businesses.
So the Autumn Statement has set the tone for the control of the public finances in the next Parliament. Tight restraint of spending will still be needed and the scope for tax giveaways is very limited.