autumn statement: in search of confidence
Political Overview
It felt like Budget Day as the Chancellor delivered his statement to a packed House of Commons. As he pointed out, the OBR’s dramatic downgrading of growth forecasts - revised down to 0.9% this year and 0.7% next - puts the institution’s independence beyond doubt. The Chancellor is hoping that commentators will read the OBR’s analysis and not just the figures; its conclusion that UK growth has been hampered by unexpected rises in commodity and energy prices, as well as the Eurozone crisis helps the Chancellor to defend his economic Plan A. Just as the bad news was linked to wider events, so the Chancellor linked his ability to intervene on mortgages and credit easing with his international credibility.
The extension of pay restrictions for public sector workers until 2015 and a faster rise in the state pension age are painful consequences of a lack of growth. This extension of the age of austerity means pressure will be on the Chancellor to demonstrate fairness - via increases in the bank levy and, although not mentioned today, probable maintenance of the top rate of income tax.
The abolition of the planned fuel duty increase in January is the most striking example of the need for the Chancellor to help with living costs where he can – he was careful to position this as a reduction on a necessity rather than the cheery giveaway it might have been painted as in more prosperous times.
Growth
‘British savings for British jobs’ is the tagline that the Chancellor hopes will stick after he announced today that pensions funds will contribute the majority of a £30bn investment in national infrastructure projects.
By reducing current spending the government will provide an additional £5bn in capital spending by 2015 for schools, transport, waste, energy and superfast broadband. There is also the promise of a further £5bn in the next Parliament. Crucially this can be achieved without increasing borrowing. The Coalition will hope this move will provide a short term boost while improving long term economic competitiveness.
The government will ultimately be judged on its success in unlocking at least £20bn of the £1 trillion assets held by pension funds. All it has agreed thus far is a MoU. The Treasury is confident that signposting 40 projects should attract private money looking for steady long-term returns. If successful, then ‘British savings for British jobs’ will overhaul the UK’s creaking infrastructure without threatening the deficit reduction strategy.
Credit Easing
The National Loan Guarantee Scheme, an idea first floated by the Conservatives in Opposition, will make available up to £20 billion of guarantees for bank funding over the next two years. The announcement would seemingly negate the need for further SME lending targets under any renewal of the Merlin agreement but will test the banks’ argument that the problem in SME lending is one of demand, not supply. There was also good news for mid-caps with the creation of a new £1bn investment fund and the promise of further consideration of options to stimulate non-bank lending.
Housing Strategy
A mortgage indemnity scheme will help 100,000 families to purchase new-build homes while a reinvigorated Right to Buy scheme will offer social tenants discounts of up to 50% off the cost of their home. This was an announcement greeted with cheers from the Coalition’s benches. Property sales under Right to Buy will fund the construction of extra affordable housing. A £400m “Get Britain Building” fund will provide development finance to businesses for the continued construction of developments that have already secured planning permission. The Chancellor also announced conditional support for locally popular development proposals.
Cutting Red Tape
The Chancellor confirmed Vince Cable’s proposed changes to employment red tape, announcing a consultation on no-fault dismissal for micro-businesses and a call for evidence on streamlining collective redundancies of 100 or more staff from 90 days to as few as 30. Employment tribunals will see “radical reform”.
The government will launch a review of regulators to ensure that enforcement arrangements are “appropriate”. Excess health and safety requirements, particularly around apprenticeships, will be removed, as the government seeks to build on the recommendations of the recent review of health and safety regulation as part of the Red Tape Challenge.
Healthcare
Data transparency was at the heart of today’s announcements for the NHS with commitments to connect primary and secondary care datasets and release practice-level prescribing data. The government hopes transparency will drive up quality, encourage research and spur a market for data products. The NHS will also be allowed to keep the difference from slower growth in public sector pay (down from 2% to 1% in future years).
Alongside a £200m boost for research infrastructure, the government confirmed plans to establish a Health Research Agency and introduce from December a seventy day benchmark for patient recruitment in clinical trials. Life sciences firms carrying out R&D are also likely to welcome a move to an “above the line” tax credit from 2013. Further details on tax changes, including the patent box, are expected on 6 December.
Despite today’s news, the health sector will be looking to next month, when the Prime Minister will set out a strategy to ensure the UK is the “best location for translational research”.
Bank Levy
Although the Chancellor stressed that he will work to ensure that London remains a competitive international financial centre and reiterated his opposition to a financial transaction tax, banks are preparing for a third increase in the bank levy in less than twelve months. As had been trailed over the weekend, the Chancellor announced he would be increasing the levy to 0.088% in order to ensure it brings in the forecasted £2.5bn.
Fuel and Rail Duty
In a popular move, and the first win for a policy championed by the new system of ‘e-petitions’, the government will defer the 3.02 pence per litre fuel duty increase from 1 January 2012 until 1 August 2012 and the planned additional increase for 1 August 2012 has been cancelled. The Government will also fund the capping of bus and rail fare increases to RPI plus 1% from 2012, rather than RPI plus 3% as announced in the Budget
Energy Subsidies
The Chancellor announced measures to support energy-intensive businesses, including help with the costs of the EU Trading Scheme and the carbon price floor, an increase in climate change levy relief and a reduction on the impact of the Electricity Market Reforms. This will amount to a £250 million package over the Parliament.
The Youth Contract
A new “Youth Contract” will be introduced in an attempt to combat rising youth unemployment. The government will spend £940 million over this Parliament on wage incentives to encourage businesses to take on young people, who will themselves receive extra support from Jobcentre Plus. All three-month unemployed 18-24 year olds will receive an offer of work experience or a Sector Based Work Academy place.
Education
The Chancellor focused on education at the end of his statement, announcing that £600 million will be spent on 100 additional free schools while local authorities with challenging demographics will receive a further £60 million.
The government will spend an additional £380 million to provide 15 hours’ free education and care a week for disadvantaged two year olds, covering an extra 130,000 children.