The first Autumn Statement of a new parliament is a big event in the economic calendar. Yesterday’s statement by George Osborne was made, so we thought, against a difficult background: the latest statistics on public receipts and spending had been disappointing; the re-classification of the Housing Associations as public entities had put up his starting deficit; his proposed cuts to in-work benefits, for which he thought he had an electoral mandate, had been thrown out by the House of Lords; and the deteriorating international situation, highlighted by the terrorist attacks on Paris, surely meant that he would have to find more money for policing and defence.
Where would he find the money? Would he abandon, or reduce, his target surplus? Would he take advantage of lower oil prices to put more duty on petrol? And how would he present the expected savage cuts in the government departments that are not protected by a political commitment? We listened to the speech waiting for the answers to these questions, and wondering what rabbit he would pull out of the hat. It turned out that there was a rabbit, but this year it was invisible.
The first hint that this Autumn Statement would confound expectations came when he announced a budget for “economic security and national security”. “Economic security” meant that he intended to stick to his long-run target of a £10bn fiscal surplus by 2020. “National security” meant that he proposed to meet the Nato target for defence spending of 2 per cent of national income and there would be no cut to the police budget.
Then we learnt that, rather than tempering the proposed reduction in in-work benefits, he proposed to abandon it altogether. Next up was housing: the budget was doubled from £1bn to £2bn, and 400,000 new homes were promised. Infrastructure spending? The commitment to the Northern Powerhouse, and to additional spending on transport, was re-affirmed. And so it went on. Nothing but good news.
How was he going to pay for it all? To find out you have to dive into the weeds, which in this context means the detailed projections for the public finances produced by the Office for Budget Responsibility. The surprise (and this was the invisible rabbit) was an increase in the underlying forecast tax revenues of £24bn over the six years from 2015-16 to 2020-21. To this the chancellor added a further £21bn, with a raft of mostly small tax changes, of which the stand-out item is an extra £12bn from the new apprenticeship levy.
The bulk of the additional tax revenue was used to finance the new spending commitments already highlighted. The rest was used to reduce the deficit. As so often happens, the projected deficit is increased in the short term – up by £3.3bn on a like-for-like basis – with the deficit reductions coming in the four later years.
What are we to make of it all? It was, as always with Osborne, a politically deft performance. Few would quarrel with spending more money on infrastructure and housing, while protecting spending on the police and the armed forces. But seasoned observers can’t help worrying when so much of the additional expected revenue (£34bn over the six years) comes from seven separately listed “modelling changes” – seven little invisible rabbits which popped, silently, out of the chancellor’s hat and helped him balance his books.