Autumn Statement Lexcomm

29/11/2011

2011 Autumn Statement (PDF)

George Osborne wants his Statement to be reported as three big announcements: building new infrastructure, supporting business by easing credit for SMEs and cutting red tape, and relaxing the squeeze on middle-income households.  Part of his problem with tomorrow’s headlines is that in the case of all three, they were widely leaked to the press ahead of his Statement today. The other problem is that the announcements were all overshadowed by the very gloomy economic report of the independent Office of Budget Responsibility.
Forecasts for debt, unemployment and borrowing are all up while economic growth is down. Even then, the OBR’s forecasts are based on the euro surviving. In the event of its demise, everything will look a whole lot gloomier.

Faced with this dark prognosis, Osborne defined his real task as protecting the UK’s AAA rating and, with a neutral budget which nonetheless allowed some stimulus through infrastructure investment being brought forward, he broadly achieved that objective.

Lower than forecast debt repayments allowed the Chancellor to invest £5bn of government money to support a £20bn fund for investment in infrastructure. Five hundred projects in the National Infrastructure Plan will see improvements in road and rail. The Chancellor artfully name checked projects in regions across the UK, clearly hoping to garner positive coverage in the regional press.

For a Chancellor who said his Autumn Statement wouldn’t be a Brown-like media circus but a low key progress report, there were real echoes of the former Chancellor in his raft of announcements and targeted schemes. Like Brown, the Chancellor also changed his target in terms of reduction of the structural deficit, effectively making it a movable target.  There is clearly nervousness on the Coalition benches that the goal posts have effectively been moved; a political trick that the Tories in Opposition attacked Brown for doing. 

At the heart of the package is a range of expansionary policies for business, all of which had been pre announced.  There will be a credit easing programme for small and medium sized businesses, with Government underwriting up to £40bn in low-interest loans, funded by reducing the ceiling of the Asset Purchase Facility. 

Other proposals to build up British business include the extension of the Business Rate holiday to April 2013 and a new Seed Enterprise Investment Scheme.  This will provide income tax relief of 50 per cent for individuals who invest in shares in qualifying companies and a capital gains tax holiday for investments made into the new scheme.

Responding to widespread concerns about rising prices, he announced a cut in fuel tax in the New Year, a lower than expected rise in rail fares and an expansion of free nursery places to 40% of two year olds.

In a move that will be welcomed by business groups, he announced a number of measures to reduce the burden of complying with employment law including increasing the qualifying period for unfair dismissal claims to two years. 

He will also please many business leaders by announcing a £250m package (over the lifetime of the Parliament) to help Energy Intensive Industries meet the cost of rising prices of energy.

Just a day ahead of the most widespread public sector strikes for a generation, the Chancellor was far from conciliatory in announcing a review of TUPE legislation and opening the door to pay variation by region in the public sector, long opposed by the unions. The Chancellor also announced a 1% cap on public sector pay rises for two years after the end of the current pay freeze in 2012.  This will undoubtedly lead to increasing pressure on executive pay in the private sector and has generated a furious response from the unions.

There was a small victory for Iain Duncan Smith and the Liberal Democrats with the announcement that benefits will be uprated by the higher September rate of inflation, rather than an average rate reportedly preferred by the Chancellor. Michael Gove at Education and Justine Greening at Transport were the big departmental winners with an additional £600m for Free Schools and an array of transport projects included in the Infrastructure Plan.

While the bank levy will be increased from 1 January 2012, the Chancellor avoided appearing to engage in banker bashing, explaining that the Government intends that the Bank Levy should raise at least £2.5 billion each year and that the levy needs to be raised to meet this target. Refusing to bow to growing pressure from business, he also confirmed Air Passenger Duty for all passengers will increase in April next year as set out in the Budget.

The Chancellor finished his statement by acknowledging that he does not have a miracle cure and even said that he will not get everything right.  The Coalition’s much hyped focus on growth has not yet come to fruition but the range of measures announced will be welcomed by some in the business sector, although they will be increasingly alarmed by the broad economic analysis.

NATIONAL INFRASTRUCTURE PLAN
The National Infrastructure Plan, published today, sets out the Government’s new strategy for meeting the infrastructure needs of the UK economy with three main elements:
 Bringing together the first comprehensive cross-sectional analysis of the UK’s infrastructure networks and sets out a pipeline of over 500 infrastructure projects, worth over £250bn.
 Setting out a new approach to coordinating public and private investment in UK infrastructure.
  A new Cabinet Committee, chaired by the Chief Secretary to the Treasury, has been set up.

Financing infrastructure investment
The Government has signed a Memorandum of Understanding with two groups of UK pension funds to support additional investment in UK infrastructure. The Government is also working with the Association of British Insurers to set up an Insurers’ Infrastructure Investment Forum. The Government will target up to £20 billion of investment from these initiatives. The Government will also explore innovative ways of financing infrastructure investment, including tolls.

Key objectives
  Achieving a secure, diverse and reliable energy supply for the UK while reducing the carbon intensity of electricity generation at the least cost to consumers.
  Improving the performance, capacity, connectivity and environmental impacts of the UK’s transport networks including maintaining the status of the UK as an international hub for aviation.
  Increasing superfast broadband and mobile coverage.

SUMMARY OF MAJOR ANNOUNCEMENTS

CREDIT EASING
  The Government will introduce up to £20 billion of guarantees for bank funding through a National Loan Guarantee Scheme, over a period of two years.
  An initial £1 billion will be made available through the Business Finance Partnership, which will invest in smaller and mid-sized businesses through non-bank channels.

ENTERPRISE
  The Government has announced the provision of 50 per cent income tax relief on investments and the offer of a capital gains tax exemption on gains realised in 2012-2013 through investment with a new Seed Enterprise Investment Scheme from April 2012.
  An introduction of an ‘above the line’ tax credit in 2013 to encourage research and development activities.

BANKING      
  The Government has also announced an increase in the rate of bank levy to 0.088 per cent from 1 January 2012.

FUEL AND TRANSPORT
  The Government has stated that it will defer the 3p increase in fuel duty to 1 August 2012, moved back from 1 January 2012. It will also cancel the inflation increase that was planned for 1 August 2012.
  On transport, the Government will also cap the increase to Transport for London fares and regulated rail fares to the Retail Prices Index plus 1 per cent for one year from 2012
  The Government has confirmed that Air Passenger Duty is to rise in 2012, as outlined in the Budget earlier this year.
  In addition, the Government has announced the extension of the Air Passenger Duty to flights taken on business jets from 1 April 2013.

PUBLIC SECTOR PAY
The Government will set public sector pay awards at an average of 1 per cent for each of the two years after the current pay freeze ends.
The Government will also be asking independent Pay Review Bodies to look into measures to make public sector pay more responsive to local labour markets, to report in July 2012.

BENEFITS
  The Government has stated that the £110 planned above inflation increase to the child element of Child Tax credit will not go ahead. Instead it will uprate it in line with the Consumer Prices Index 2012-2013.
  The Government will bring forward a raise in the state pension age from 66 to 67 between April 2026 and April 2028, previously set to take place in 2035.
  The Government will set plans for spending in the 2015-2016 period that fall into line with the spending reductions contained within the 2010 Spending Review period.

EMPLOYMENT
  The Government has announced that it will be looking into a range of measures to reform employment law.
  This has included looking into establishing a ‘Rapid Resolution Scheme’ as a cheaper alternative to tribunals, completing a call for evidence on the impact of reducing the collective redundancy process from 90 days, to 60, 45 or 30 days.
The Government will open a call to evidence on two proposals for the introduction of compensated non-fault dismissals for micro-businesses and for a more simplified dismissal process.

EDUCATION
The Government has stated that it will invest an additional £600 million to fund an extra 100 ‘Free Schools’ by the end of this Parliament
It will also invest an extra £600 million to support local authorities with ‘the greatest demographic pressures’. This is the equivalent of an additional 40,000 school places

HOUSING
  The Government has announced that it seeks to ‘reinvigorate’ Right to Buy for social tenants.
  The Government has re-announced the introduction of a new indemnity scheme to increase the supply of mortgage finance to new build homes.

UNEMPLOYMENT      
  The Government also stated that it will introduce a Youth Contract worth up to £940 million over the Spending Review 2010 period.
  It has also announced that it will extend the offer 15 hours a week free education and care for disadvantaged two year olds for an extra 130,000 children.


AUTUMN STATEMENT: EARLY RESPONSE

THE CITY

Reaction to the borrowing forecasts has been relatively subdued. Economic forecasters such as Jonathan Loynes of Capital Economics and Howard Archer of IHS Global Insight said that although the numbers were bad, the longer-term outlook remained good.  However, concerns about SME lending remain. Paul Aitken of Borro said that banks still are not meeting the demand for finance, and Paddy Earnshaw of Travelex questioned if the Government understands SMEs.  Tony Bernstein of chartered accountants HW Fisher & Co said that the statement was ‘deeply pro-business’, highlighting in particular the Seed Enterprise Investment Scheme.

BUSINESS GROUPS
Broadly, business groups welcomed today’s Statement. The Federation of Small Businesses welcomed good news on capital gains and credit easing.  The CBI welcomed ‘plan A+’ particularly capital spending and infrastructure.  The Forum of Private Business said there should have been incentives for new lenders, but that there was some good news for SMEs.

UNIONS
Brendan Barber of the TUC said there will be a ‘massive squeeze’ on the living standards of public sector workers.  Unite the Union General Secretary, Len McCluskey said that the infrastructure plans to rescue the British economy are ‘too little, too late’ and claimed that the Chancellor is determined not just to raid public sector workers’ pensions, but their wages as well, with the news that public sector pay will be capped at one per cent for two year.


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