Media Release

SMF response to the Spending Review: Osborne has been thrown a lifeline by the OBR and Bank of England

Osborne has been thrown a lifeline by the OBR and Bank of England.

Social Market Foundation (SMF) Director, Emran Mian commented on the Spending Review: 
The Bank of England’s outlook for interest rates saves the Government money on debt interest. The OBR has changed its models for forecasting tax receipts. Overall, the Chancellor has an extra £27 billion to use.

Even so the OBR judges that the Chancellor has only a 55% chance of achieving a surplus by the end of the Parliament. It’s no surprise then that he has kept his surplus target at £10 billion, rather than lowering it. This means the Chancellor has a bit of flexibility if tax receipts disappoint or any other proposed cuts start to unravel.

It’s striking, for example, how little detail there is on some of the departmental spending cuts. The Ministry of Justice has to save about £1bn from its budget by the end of the Parliament. The Autumn Statement only explains how about a quarter of those savings will be made; and even those require big upfront investment.

The Chancellor is also raising taxes, an extra £5 billion a year by the end of the Parliament, with local authorities potentially raising up to another £2 billion more through council tax on top of this. It’s mostly business that will pay more, including an extra £3 billion per year through the apprenticeship levy. That plus the National Living Wage suggests the Chancellor is refinancing the state through charges on business.



Social Market Foundation (SMF) Chief Economist, Nida Broughton said: 
This Autumn Statement leans heavily on the OBR’s £27 billion improvement in its forecasts. Much of this comes from the OBR’s view that tax receipts – from income tax, National Insurance, VAT and corporation tax – are now going to be higher than previously expected especially over the coming three years.

But we must remember that forecasting four years ahead is always extremely challenging and unsurprisingly, the OBR’s record here is patchy. The OBR’s 2010 forecast under-predicted the 2014-15 deficit by £60 billion, largely due to poor economic growth. This time, the OBR estimates the chances of a surplus in 2019-20 at 55%. If the growth doesn’t happen, Osborne could have to bring back cuts in future Budgets.

The good tax forecasts are partly due to expected improvements in employment and company profits. But there are big changes that are down purely to changes in the OBR’s modelling methodology. They add around £6 billion a year to the tax take forecast. That has allowed the Chancellor to keep to his plan of eliminating borrowing and running a surplus by 2019-20, as well as reducing the pace of the cuts. The cut to day-to-day departmental spending by 2019-20 is set to be only £10.4 billion a year rather than the £17.9 billion a year expected in the Summer.



SMF Researcher Ben Richards said: 
The Chancellor performed a major U-turn on tax credits by cancelling the reforms altogether. Instead tax credit claimants will only be affected by the freeze in benefits over the next four years, rather than a cash-terms cut.

However, cuts to Universal Credit will remain, and will mean that new Universal Credit claimants are likely to face much more meagre levels of support than those claiming tax credits. In the long run this will mean that the Chancellor’s tax credit cuts in effect are implemented anyway. In the short run, however, it will create a number of issues for claimants, and will make the task of communicating the benefits of Universal Credit an uphill struggle for the Government.

First, there are likely to be large inequities between different areas, with areas that have already implemented Universal Credit offering much lower support. In 2016-17 for instance, a one-earner couple with two children would take home nearly £800 more if living in an area using the tax credit system, compared to an area using Universal Credit, if working full-time earning the minimum wage. This could create perceptions of regional unfairness.

Second, tax credit claimants have a big incentive not to change their circumstances in areas in which Universal Credit is being rolled out. Since new claimants, and claimants with changed circumstances, are likely to be enrolled in Universal Credit, those already receiving tax credits would do well to stay on them by keeping their circumstances unchanged. This could mean refusing to take on more work, or refusing a promotion, for fear of being unable to reclaim tax credits at a later date.



SMF Researcher Director Nigel Keohane commented:
George Osborne clearly wishes to redefine affordable housing. He wants to help double the number of first-time buyers rather than provide state-owned homes for affordable rent. Broadly speaking this will be good news for young people with secure and reasonable incomes but could be bad news for those on social housing waiting lists.

The reduced rental incomes for housing associations due to lower regulated rents and reductions to housing benefit will emphasise this shift.

Two decades ago we were building four affordable homes to rent for each affordable home to buy. The 335,000 new affordable ‘homes to own’ mean that by the end of the parliament the ratio may be the other way round.

It’s too early to tell how far this new government home building programme will boost housing supply overall or whether it will simply be the route by which private developers supply the homes they would have built anyway.



SMF Senior Researcher Matthew Oakley commented:
The Chancellor has missed a vital opportunity on welfare. He’s effectively dealt with spending pressures at the Spending Review – better than expected public finances have made up the gap left by his tax credit reforms stalling in the Lords, and his £12billion welfare savings will still be in place when Universal Credit is fully in place (simply delaying the pain for a couple of years).

But his approach basically continues the process of ad-hoc cuts that has dominated the last six years of benefits policy.

George Osborne should have been bolder, ensuring that people are properly supported to tackle the barriers to work they face, and to increase their hours and earnings. This would have tackled the tax credits problem at source by boosting families earnings and removing the need for state support completely. The Exchequer would also have gained: increasing in-work claimants work by less than an hour a day could have saved the Chancellor £4.1 billion a year.



SMF Researcher Director Nigel Keohane said:
The distributional effects across England of the phasing out of £6bn of local government grant and the full localisation of business rates could be huge – with the south benefitting more than the north.

The early effects of such decentralisation will be felt in social care funding, where the 2% Social Care precept will mean plenty of additional resources for those councils with a strong local tax base in the south but much less for many councils in the north.

It is hard to see the localisation of business rates doing anything but reinforcing this inequality. This ups the ante on Osborne’s ‘active and sustained industrial strategy’ in the regions.


Notes to Editors:

  • Social Market Foundation staff are available for comment and interview.
  • The Social Market Foundation (SMF), founded in 1989, is a non-partisan think tank. We believe that fair markets, complemented by open public services, increase prosperity and help people to live well. While other think tanks are known for taking positions that are on the left or right of political debate, the SMF occupies the radical centre.
  • The SMF is resolutely independent, and the range of backgrounds and opinions among our staff, trustees and advisory board reflects this. Our research looks at a wide range of economic and social policy areas, focusing on economic prosperity, productivity, public service reform and consumer markets.



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