Autumn Statement 2014 - A political analysis

The battles lines ahead of next year’s general election have well and truly been set out by the UK Chancellor, George Osborne, who, in the last Autumn Statement of this Parliament, unveiled a series of policies designed to neuter his political opponents. With key deficit reduction targets continuing to be missed and questions about where the public spending axe will fall, the Chancellor faced a potentially difficult afternoon. Balancing the books clearly remains a formidable task.

Paul Johnson, Director of the Institute for Fiscal Studies, stated on this morning’s Today programme that only 40 per cent of the cuts needed will have been made by the end of this parliament. In spite of the scale of the economic challenge ahead, the Chancellor pointed towards data indicating that the UK economy has the fastest growth rate in the G7, forecasts from the Office of Budget Responsibility (OBR) predicting a continuing fall in unemployment, and news that regular earnings growth is now faster than inflation. The Chancellor argues that, in the context of global economic uncertainty, this positive economic news, illustrates why his long term economic plan is paying dividends. Fundamentally it fits in with his core electoral narrative – that only the Conservatives can be trusted on the economy.

Numerous measures announced yesterday, and in the days preceding the statement, were evidence of the Chancellor’s focus not just on the economy, but on next May’s general election. In areas of traditional Labour territory such as the NHS, he outlined plans to spend an additional £2 billion for frontline services in England in 2015-16. Other measures such as the introduction of a ‘diverted profits tax’ from April 2015, designed to tackle tax avoidance from large multinational companies, were indicative of his desire to mitigate the accusations of his opponents that his party is only interested in protecting the rich and big business. The introduction of measures such as the doubling of Small Business Rate Relief for a further year, and more support for small companies taking on apprentices were part of his message that it is this Government, and not the Labour Party, that is on the side of small business.

The Chancellor, like many of his predecessors, found time to pull out a proverbial rabbit out of the hat in the shape of a radical shake-up of stamp duty. This reform will see house buyers only start paying tax when the property price goes over £125,000, whereupon tax will apply only to that part of the property price that falls within newly designated marginal tax bands - similar to income tax. This, the Chancellor declared, will mean a stamp duty cut of 98% for people who pay it and is evidently the Conservative rebuttal of Labour’s mansion tax plan. It is also another central part of Conservative positioning - they will represent the 98%, not the 2%; and will help the aspirational to get on the housing ladder. In other areas such as in the increase of the income tax-free personal allowance, and the ability for spouses to now inherit their partner’s individual savings account (ISA) benefits after death, the Chancellor was seeking to underline how he is on the side of those who work, and who save.

Another significant focus of the statement was devolution, which is set to become another key electoral issue. For the North of England, £7 billion was promised to help create a ‘Northern Powerhouse’ and investment in science facilities such as a new Sir Henry Royce Materials Institute in Manchester, with centres in Leeds, Liverpool and Sheffield. Business rates will now be fully devolved to Wales, and Corporation Tax is set to be devolved to Northern Ireland. In addition, income tax is to be fully devolved to the Scottish Parliament. Separately, the Chancellor’s stamp duty reform, which will now only be available in Scotland for a limited window of four months, when a new Scottish law is introduced, a tax which will be more punitive for most Scots than in the rest of the UK, arguably illustrates how it was not just Labour who were in the Chancellor’s sights, but the SNP as well. In this context of the ‘sheer scale’ of devolution to Scotland, the Chancellor maintained that the case for English votes for English laws is now “unanswerable.” This yet again was part of his attempts to put Labour on the back foot, and to outflank UKIP.

In terms of policies to stimulate technology and innovation, there was a significant focus on fintech. There will, for example, be a new ‘bad debt relief’ for those lending on peer-to-peer (P2P) platforms. There will also be a consultation on whether to extend ISA eligibility to lenders using crowdfunded, debt-based securities, and also a call for evidence on how Application Programming Interfaces (APIs) could be used in banking. In addition, an additional £400 million will be provided to support venture capital through the British Business Bank’s Enterprise Capital Funds programme. Support for Research and Development (R&D) was also enhanced, with tax credits for SMEs increased to 230% from April next year. Another document published alongside the Autumn Statement yesterday, which will be of interest to companies in the technology sector was the ‘Efficiency and Reform in the next Parliament’ report. This sets out how £10 billion of efficiency savings will be delivered in the next Parliament, with digital technology playing a fundamental role.

So what did his opponents make of all this? Well, Ed Balls, the Labour Shadow Chancellor, subjected to intense heckling by Conservative backbenchers, responded in robust fashion declaring that the Chancellor had failed to meet any of his economic targets. Mark Reckless, the newly elected UKIP MP, criticised the level of borrowing and spending on areas such as international development, the European Union and renewable subsidies. John Swinney, the SNP’s Deputy First Minister, argued that “with a further £25bn of cuts in the future, the Westminster government is locking Scotland into austerity against our wishes.” The Greens were similarly critical lambasting the Chancellor for failing to deal with the “the pressing problems of poverty and low wages”. This criticism is, of course, all part of the traditional post-statement politicking and it is the battle with Ed Balls, the Chancellor’s long-term sparring partner, which will come to dominate the months ahead and be of most significance. The stakes are high as both men know that it is economic credibility, and the strength of their respective narrative, that will largely determine the outcome of the general election.

Osborne’s coalition partners, the Liberal Democrats, and in particular Danny Alexander, Chief Secretary to the Treasury, were, as you would expect, supportive of the statement and keen to emphasise that it is only because they are in government that an economic recovery has occurred. Interestingly, Nick Clegg, the Deputy Prime Minister, chose not to attend, preferring to “talk to normal people” in Cornwall. He did, however, say today that he was proud of the statement, as he had co-authored it. Coalition tensions were not entirely absent yesterday with Vince Cable, the other Liberal Democrat heavyweight, warning that his party does not agree with its coalition partner on how to cut the deficit in the next parliament. Cable indeed called on the OBR in a letter to spell out the differences between the two parties so that voters can see where the dividing lines are. This distancing from the Conservatives will become increasingly evident in the months ahead.

This was yet another political Autumn Statement from the Chancellor. With a general election less than six months away, anything else would have been a surprise. With very little room for fiscal manoeuvre, the Chancellor sought to strengthen areas of traditional Conservative strength, and advance into the traditional territory of his opponents. How successful he will be in meeting this dual objective will be decided on May 07 2015. The clock is ticking.