George Osborne yesterday admitted that the government will miss its own growth and debt reduction targets, forcing him to extend his austerity measures for another year to 2018.
Insisting that he would not change his approach, Osborne told the House of Commons that “Britain is on the right track” and “turning back now would be a disaster”.
The Office for Budget Responsibility confirmed Osborne is now likely to miss a self-imposed fiscal rule of starting to cut UK debt as a share of GDP by the 2015-16 tax year. It also expects the economy to shrink by 0.1 per cent this year and to grow by just 1.2 per cent in 2013, down from a previous estimate of two per cent in March.
Last night Fitch Ratings said missing the debt reduction target “weakens the credibility of the UK’s fiscal framework” and it will now have to consider whether the country deserves to keep hold of its prized AAA sovereign debt rating. The budget deficit will fall slightly in 2012-13 but only thanks to an expected £3.5bn from the sale of 4G licences.
Most workers will benefit from a substantial increase in the personal allowance, which will now rise by £1,335 in April 2013, meaning no tax will be paid on income under £9,440.
Meanwhile there was success for a campaign to keep down the cost of driving. Osborne scrapped January’s planned 3p/litre petrol duty for good.
Campaign leader Robert Halfon MP last night told City A.M. that the decision showed his party is “on the side of hard-pressed motorists”.
PwC declared that “Middle England are the biggest losers” from yesterday’s announcements. According to Treasury officials, the combined effect of today’s measures will see the income of a typical higher rate taxpayer rise by £47 next year, be unchanged in 2014 and drop by £107 in 2015.
The chancellor used yesterday’s mini-budget to announce that working-age benefits – such as child benefit and jobseeker’s allowance – will increase by just one per cent for each of the next three years, leaving millions of people facing a real-term cut to their income, albeit after large increases in recent years. But pensioners will be protected from the cuts.
The tax-free allowance for private pensions will be cut to £40,000 a year from 2014, and the maximum pension pot to £1.25m, which the government claims will increase revenues by £1bn. Osborne said reducing the limit will only affect the top one per cent to show that “we are all in it together”. Banks were hit by another increase to the levy on their balance sheets.
Osborne also said the threshold for paying the higher rate of tax will rise below inflation – pushing 400,000 more taxpayers into the 40p band. But the prime minister successfully resisted persistent demands from the Liberal Democrats for a mansion tax on top-end property or to introduce higher rates of council tax.
Corporation tax will be reduced by a penny to 21p from April 2014, with a Treasury aide saying they still hoped to reduce it even further. In a boost to small firms, the 100 per cent annual investment allowance was raised to £250,000.