30 November 2011

Chancellor George Osborne delivered his Autumn Statement at lunchtime on Tuesday, November 29th against a backdrop of gloomy economic forecasts.

The previous day, the Organisation for Economic Co-operation and Development (OECD) had predicted that the UK would slip back into “a modest recession” early in 2012, with unemployment reaching 9%. The OECD blamed this on a weak demand for exports, the Government’s austerity measures and the squeeze on consumer spending.

Reporting on Tuesday morning, the Office of Budgetary Responsibility (OBR) was slightly more optimistic, forecasting growth of 0.7% for 2012 and 2.1% in 2013. However their forecast of growth reaching 3% from 2015 was looked on sceptically by most commentators.

The Chancellor began his statement by emphasising that Britain “would live within its means” – but he still promised a significant investment in education and infrastructure projects, so that the country “could pay its way in the future.”

Government borrowing is currently predicted to hit £127bn in 2011/2012. However, the problems in Europe mean that total Government borrowing over the next four years is now forecast to be higher than originally anticipated with an extra £112bn being needed.

It was inevitable that figures like this would mean that savings (or ‘cuts,’ depending on your political standpoint) would have to be made, and the axe quickly fell on the public sector. The Statement contained a serious amount of pain for public sector workers: pay rises will be capped at 1% for two years (after the end of the current freeze in Spring 2012), and the OBR is now forecasting 710,000 public sector job losses by the first quarter of 2017. With many public sector workers due to strike today (November 30th) presumably the Chancellor thought he might as well get all the bad news out of the way.

George Osborne also announced that the pension age will rise from 66 to 67 from 2026, which is eight years earlier than previously planned. This move will save a further £59bn. Short-term, the value of the state pension will increase by £5.30 per week from April 2012.

One of the key themes of the Autumn Statement was investment in infrastructure – as Deloitte’s head of infrastructure, Nick Prior, commented on Twitter, economic growth only comes when “shovels get in the ground.”

In a new initiative, some of the money for the infrastructure investment will now come from UK pension funds, following a model which has worked well in Canada and Australia. Joanne Segard, Chief Executive of The National Association of Pension Funds (NAPF), described the investment as “a real win-win.” Currently UK pension funds hold over £1 trillion in assets, but only 2% of that is invested in infrastructure. However, the Government is going to need to offer the pension funds long-term investments with an income that exceeds inflation. So potentially good news if you’re invested in a pension – possibly not so good if you suddenly find that you’re on a brand new toll road.

There is also a distinct possibility that we’ll see the sovereign wealth funds of other countries investing in UK infrastructure projects. Before the Chancellor’s speech the FT had already carried a piece by the Chairman of the China Investment Corporation, expressing his desire to “team up with fund managers or participate in public-private partnerships in the UK infrastructure sector.”

As well as the above, other key points in the Autumn Statement were:

  • The Bank Levy will rise to 0.088% from January 1st. The Government is aiming to collect £2.5bn a year from the Levy
  • A credit easing programme is to be introduced to underwrite up to £40bn in low-interest loans to small and medium sized businesses. The business rate tax relief holiday will also be extended to 2013
  • The Government will consult on allowing small firms to make staff redundant without them being able to claim unfair dismissal
  • The rail fare increases will be less than originally planned
  • The 3p fuel duty increase planned for January will be cancelled – so some good news for the hard-pressed motorist
  • An extra £1.2bn will be spent on education, with free nursery places being extended
  • And British science is to receive an additional £200m of extra funding to support research. (But to put this in perspective, it’s 0.2% of the value which was placed on Facebook the same day.)

Reaction to the Autumn Statement was predictably mixed. The Times said that Osborne was ‘inflicting pain to fight off [a] debt storm,’ while the Guardian concentrated on the job losses in the public sector. Many commentators criticised the Chancellor for ‘tinkering’ when bolder action was needed. Reaction to the speech on the stock market could hardly be described as euphoric, but the FTSE did manage a small gain after the Chancellor’s speech.

But as if to emphasise that Britain remains vulnerable to the world economy in general and the European debt crisis in particular, Italian bond yields reached new highs while Osborne was speaking and credit ratings agency Fitch downgraded its forecasts for the US economy. By Monday night Fitch was also warning that it is getting harder for Britain to maintain its AAA credit rating – which helps the Government to borrow at lower rates of interest.

“May you live in interesting times,” as the Chinese saying goes. Whatever the contents of his Autumn Statement, George Osborne and the British economy will certainly be doing that…

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