Autumn Statement 2011: Plan B in all but name?

29 November 2011

Today’s Autumn Statement by the Chancellor saw a slew of policy announcements, from tax credit cuts to a national infrastructure plan. The story of the Autumn Statement was a play in three acts:

  • First the big news that the Chancellor needed to find £15bn of extra cuts by 2016-17 to meet his fiscal targets, even using all the flexibility offered by his little-understood five-year rolling target. This £15bn will all come from cuts to spending, but we don’t yet know where they will fall.

  • The second big story was the shift from tax credits to transport with £1.3bn of cuts to the former being redistributed to motorists and commuters.

  • Third was investment plan, comprised of credit easing for SMEs and possible long-term reforms to get more private capital into infrastructure projects, where big numbers were trotted out – some more concrete than others. These measures have no impact on the Chancellor’s fiscal mandate but that doesn’t mean the taxpayer is off the hook.   

While the Chancellor predictably outlined his determination to stick to the deficit reduction plan, it has become clear that there is significant scope within the plan to use the public sector’s balance sheet to seek to boost growth. The Government might not call it Plan B, but the shift from austerity is remarkable. This brief response gives instant reaction and commentary to the main proposals contained in the statement. 


1. OBR unemployment forecast: Getting the Work Programme off to a much worse start than predicted

Overview: The Office for Budget Responsibility does not predict another recession in the UK but has revised GDP growth down to 0.9% for this year and 0.7% next year. Unemployment is expected to rise from the current 8.3% to 8.7% in 2012 and then fall to 6.2% in 2016

Ian Mulheirn, Director of the SMF, said:

“The OBR’s dire economic and fiscal outlook is bad news for the Government’s Work Programme, which aims to get over 2.4 million people into work over the next five years. Recent SMF analysis found that Work Programme providers would struggle to meet Government targets if the claimant count rose significantly. With the OBR’s data showing that the claimant count is going to be on average 300,000 higher each year for the next four years, and that the labour market will deteriorate up to 2013, the future of the Work Programme, at least in its current form, hangs in the balance.”


2. Tax credits

Overview: Working age benefits will also be uprated by 5.2% in line with inflation. The Treasury has reversed a promised rise in the child element of the Child Tax Credit, and the only remaining unfrozen element of the working tax credit will be frozen

 Ian Mulheirn said:

“This freeze in the only unfrozen element of the working tax credit will save the Exchequer £300m. This £300m directly funds lower fares for rail commuters from January 2012. Freezing tax credits will further erode the financial work incentive for families on lower incomes while boosting them for their higher-paid commuting colleagues – not a great use of the extra cash.” “The reversal of the promised rise in the child element of the Child Tax Credit will affect families on the lower half of the income distribution. This policy will save the Exchequer almost £1bn, paying for the freeze in the planned fuel duty rise. But for a government that’s keen to burnish its fiscal credibility, caving in to the motoring lobby seems like an unfortunate use of the £1bn savings.”


3. Childcare

Overview: Treasury will provide 40% of two-year-olds, 260,000 children from the most disadvantaged homes, 15 hours of free childcare a week 

 Ian Mulheirn said:

“This small but welcome boost to childcare will help reduce the significant costs of childcare for parents on low incomes.  As our Parent Trap report showed yesterday, the growing cost of childcare is a huge problem for parents on all incomes, and those on low incomes will be hit hardest. But as this new measure only applies to parents of the 40% most deprived two-year-old children, and only covers the first 15 hours of childcare, it is unlikely to have a major impact on the growing affordability crisis affecting all parents.”


4. Credit easing

Overview: The Treasury has announced an additional £40bn to underwrite loans for small and medium sized firms. The Chancellor estimates it will cut the average interest rate faced by those firms by 1%

Ian Mulheirn said:

“Credit easing is a welcome move, with the aim of supporting and boosting a burgeoning SME sector. But lowering the cost of credit alone won’t boost growth unless it leaders to increasing demand for credit among SMEs. It remains to be seen whether they have sufficient confidence in the economic outlook to start investing. Either way, if the scheme is to have any real impact on the economy, the Treasury will have to take on a fair amount of credit risk from banks issuing SME loans. The Government has said many times that you can’t ‘borrow your way out of a debt crisis’. But underwriting the borrowing of others is essentially the same thing.”


5. Infrastructure

Overview: The Treasury will switch £2bn per year from current to capital spending and will involve trying to tap pension funds for £20bn in infrastructure investment

Ian Mulheirn said:

“This is welcome. The UK economy is facing a much graver problem than a lack of consumer demand: today’s OBR statement shows that the economy’s productive capacity is significantly smaller than everyone had hoped earlier this year. Massive investment in chargeable infrastructure – toll roads, energy infrastructure and the like – is the fiscally credible solution. But anyone thinking that this a quick fix is sorely mistaken. The Government will have to reduce the risk of such large projects if pension funds are to find the offer attractive. And taking away risk from investors means putting it onto taxpayers’ way. As with credit easing, this is more of a plan B than the Government or the opposition want to admit.”

 

6. Youth unemployment

Overview: To provide large financial incentives for firms to hire young workers who’ve been out of work for over nine months

Ian Mulheirn said:

“While the intention to support young people into jobs is a good one, evidence suggests that policies like these do little to help and are a waste of money. The vast majority of firms who hire to take advantage of this kind of offer would have hired someone anyway – it may just be that now they fill the vacancy with a young person at the expense of a no-less-deserving older unemployed worker. The sad truth is that high rates of unemployment can’t be tackled by tinkering in the labour market – with either regulation or hiring subsidies. The only real solution lies in improving the macroeconomic outlook to stimulate demand.”


7. Housing

Overview: The Government’s housing strategy includes a mortgage guarantee scheme whereby the Government will underwrite 95% of mortgages on 100,000 homes

Ian Mulheirn said:

The indemnity scheme involves taking a lot of risk onto the public sector balance sheet. This is bad for taxpayers and worse for those who take up the scheme. If house prices fall, the cost to the taxpayer could be substantial. Meanwhile for those people enticed into an over-priced market, this plan is a leg up into negative equity. The credit market is telling would-be buyers to stay away from housing, but the messages from government are in the opposite direction: many will see the indemnity plan as a government stamp of approval, creating a false sense of security.”

 
8. Localised public sector pay

Overview: As well as a 1% cap on public sector pay rises from 2013, the Chancellor announced a review of regional pay levels, which he hopes will become "more responsible to local labour markets"

Ian Mulheirn said:

The Government is right to try to address the long-standing problem of national pay bargaining. Uniform national pay levels in the public sector make private enterprise uncompetitive in precisely the areas of the country where we need more of it. By contrast, public sector workers in the South East get a raw deal on pay, with serious consequences for the quality of vital public services.”

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