One of George Osborne?s early decisions as Chancellor was that there would be no more Pre-Budget Reports. Instead, the tradition of the Autumn Statement was to be reintroduced, allow
One of George Osborne?s early decisions as Chancellor was that there would be no more Pre-Budget Reports. Instead, the tradition of the Autumn Statement was to be reintroduced, allowing the Chancellor to give an interim view of the UK?s finances.
However, the Chancellor?s 2011 Autumn Statement looked very much like a Pre-Budget Report of old. Osborne made a wide range of announcements (and re-announcements) on everything from nursery care for disadvantaged two-year-olds to 100% capital allowances for the Black Country enterprise zone.
The raft of measures were nearly all aimed at stimulating growth and limited the time that the Chancellor could spend on addressing budgetary matters. This may have suited Osborne, as the news was not good. Updated projections from the Office for Budget Responsibility (OBR) show that the Treasury budgetary target will not be met until 2016/17 ? two years later than predicted at the March 2011 Budget.
Economic background
Osborne established the OBR soon after he became Chancellor to provide an independent view of government finances.
Its view is that the Chancellor?s 2010 plan is now off-target and the UK?s finances will not be back in balance by 2014/15. Instead the plan has slipped by two years, taking the break-even date to beyond the next election. Thus the Chancellor has been forced into an effective extension of his plan, announcing reductions in total managed expenditure of 0.9% a year for the two years after the end of the current spending review period (2014/15).
The blame for the fiscal deterioration is largely down to disappointing economic growth. In turn, the Treasury attributes the lower growth to:
? Higher than expected inflation, driven by a sharp increase in global commodity prices. The OBR believes this to be the main reason for slower than expected economic growth since the June 2010 Budget.
? The Eurozone crisis, which is feeding through to household and corporate spending decisions and to tighter global credit conditions.
? The persistent impact of the 2008/09 financial crisis, which has destroyed more productive capacity than originally thought to be the case.
The OBR now expects 2011 and 2012 to produce just 0.9% and 0.7% annual growth, compared with forecasts it made in March of 1.7% and 2.5%. However, for 2015 and 2016 the OBR projects that growth will be 3% a year.
In other words, the OBR and the Chancellor believe that a double dip will be avoided. However they do acknowledge that this could change if the Eurozone crisis gets much worse.
Unemployment is expected to increase to 8.7% next year before falling back to 8% in 2014, below the current level of 8.3%. The combination of high unemployment and low growth will lead to increased expenditure and reduced tax income.
All this will put more pressure on the Treasury than expected and the government will need to borrow more money. It now expects to borrow ?111 billion more than anticipated over the next five years. This year?s total is now expected to be ?127 billion. It should then start falling, down to ?53 billion in 2015-16.
The structural deficit will therefore not be wiped out by 2015 as planned, but by 2017. The national debt as a percentage of GDP (Gross Domestic Product) will continue to rise and peak at 78%, well above the 71% forecast in March. It will start to fall in 2015-16, but only by 0.3%.
All in all, there are virtually no prospects for any significant tax cuts for the foreseeable future.
Key announcements
Spending cuts ? Osborne announced plans to continue cutting spending until 2017; by ?15 billion more than forecast.
State pension age ? The increase to age 67 has been brought forward eight years and will now happen between 2026 and 2028. This is a necessary measure to allow the government to ?pay decent pensions for longer? and will save the Treasury ?60 billion. Rising life expectancy has made this change unavoidable ? it will not be the last increase we see, in the UK or elsewhere.
Basic state pension ? This will rise by ?5.30 to ?107.45 a week. The full couple rate will rise by ?8.50 to ?171.85. The standard minimum income guarantee in Pension Credit will increase by 3.9% to ?142.70 a week for single pensioners and ?217.90 for couples. The threshold for Savings Credit will be raised to ?111.10 for single pensioners and to ?177.20 for couples. This is all from April 2012.
Capital gains tax – The annual exempt amount for CGT, which normally increases with inflation, will be frozen at ?10,600 for 2012/13. The government?s economic projections, published on the same day, suggest it could be frozen until 2017, by which time the value of ?10,600 could have fallen considerably.
Seed Enterprise Investment Scheme – The SEIS will be launched from April 2012, with 50% tax relief for investments of up to ?100,000 and a CGT exemption for reinvestment.
Businesses – Osborne spent some time setting out a basket of business friendly measures, including increasing the availability of finance for small and medium-sized enterprises and extending the small business rate relief for a further six months from October 2012.
The Chancellor said the extra spending would be funded through central government savings and a 1% cap on some public sector pay increases for the two years after the current freeze ends in 2013: ?The measures set out today require no extra borrowing and provide no extra savings across the whole Spending Review period.?
All in all, the Autumn Statement is proof, if any were needed, that austerity measures will be around for longer than originally anticipated, and this is not just in the UK either but throughout Europe. With tax rises high on the list of measures, if you haven?t already done so you need to take what steps you can to protect your wealth from unnecessary taxation. An experienced adviser like Blevins Franks will talk you through your options.
By Bill Blevins, Managing Director, Blevins Franks
1st December 2011
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual must take personalised advice.
