Autumn Statement Look Ahead Lexcomm

11/11/2011

2011 Autumn Statement Look Ahead (PDF)

All eyes will be on Chancellor George Osborne as he delivers what will be the most difficult Autumn Statement in living memory on Tuesday 29th November.  In the wake of likely depressing economic forecasts from the Office for Budget Responsibility (OBR), it will take more than the second stage of the Growth Review to lift the spirits. Turmoil abroad and rising unemployment at home make for a very worrying time for the Coalition.  
Business will want to see that the Chancellor understands their concerns (the CBI’s recent business outlook survey will have made grim reading for Osborne) and is acting in the long term interest of the economy.  This is no time for clever political flourishes.  The Government’s constant refrain is that business is at the core of its growth strategy.  Now is the time for the Coalition to prove that this is the case. 

The circumstances, however, are challenging to say the least. The Bank of England Governor, Sir Mervyn King, warned that the global economic outlook had ‘worsened, with the eurozone crisis the biggest threat to UK recovery’. The OBR is expected to downgrade its projections, bringing into question whether the Chancellor will eliminate the structural deficit in this Parliament. 

Speaking at the CBI Conference ahead of the Autumn Statement, the Prime Minister called optimistically for a, ‘fundamental rebalancing of the economy: more investment, more exports, a broader base to an economic future’ but later admitted in the Q&A session that there is a danger of a lost generation of young unemployed.  Next Tuesday the Chancellor will have to reassure his audience that he has both the long term strategy to successfully rebalance the economy as well as measures in hand to tackle the immediate issues, particularly that of rising youth unemployment. 

Boosting investment will be the major theme of the Chancellor’s statement and the Government needs to show that it is rolling up its shirt sleeves and making real progress in building up the private sector, particularly mid-sized businesses.  It has been widely trailed that the Chancellor will outline how he intends to persuade investors to invest in infrastructure, notably in roads, super fast broadband, rail links, power stations and ports.  The exact nature of the vehicle for funding arrangement is reportedly still being debated by BIS and the Treasury. 

Further details of the Government’s housing strategy are expected, building on the proposal, announced by the Prime Minister on 21st November, for a ‘new build indemnity scheme’ with Government and house builders providing security for loans to first time buyers.  This is one of a number of measures aimed at getting people on the housing ladder.

As well as rising unemployment, inflation is a major issue, with the UK experiencing the highest rate in the EU.  Both issues are causing a rift in the Coalition. September’s Retail Price Index (RPI) is typically used to establish uprating for benefits for the following year and in September 2011 RPI was a 20 year record high of 5.2 per cent.  With wages in the public sector frozen and growing at just 2.5% in the private sector, Osborne has put the case for benefits to be uprated by a (lower) average measure of inflation. This position was derided only a week ago by Business Secretary Vince Cable but reports suggest that Osborne may have won this battle in recent days.

Fuel costs are, as ever, a source of political difficulty (political leaders shudder at the memory of the fuel crisis in 2000) and in a recent parliamentary debate, called in response to an e-petition signed by 110,000 people, MPs approved a motion urging action on fuel prices. Although not binding, it has served to raise the issue of fuel prices to the top of the political agenda.  Potentially the change in benefits uprating could pay for a freeze in fuel taxes.

The crisis in the eurozone will undoubtedly overshadow Tuesday’s announcement.  In the short term uncertainty is arguably convenient for Osborne who will use the crisis, in part, to explain the disappointing growth data. The flight of investors from the euro area to Britain, helpfully bringing down long term interest rates, also supports Osborne’s portrayal of the UK as a safe haven in a storm.

But while all agree that the situation is challenging, there is tension within Whitehall and between the coalition partners regarding the means of securing recovery.  The Chancellor not only has to find policies palatable to both parties, but also motivate departments to all work to the same end: that of creating jobs and growth.

The circumstances, however, are challenging to say the least. The Bank of England Governor, Sir Mervyn King, warned that the global economic outlook had ‘worsened, with the eurozone crisis the biggest threat to UK recovery’. The OBR is expected to downgrade its projections, bringing into question whether the Chancellor will eliminate the structural deficit in this Parliament. 

Speaking at the CBI Conference ahead of the Autumn Statement, the Prime Minister called optimistically for a, ‘fundamental rebalancing of the economy: more investment, more exports, a broader base to an economic future’ but later admitted in the Q&A session that there is a danger of a lost generation of young unemployed.  Next Tuesday the Chancellor will have to reassure his audience that he has both the long term strategy to successfully rebalance the economy as well as measures in hand to tackle the immediate issues, particularly that of rising youth unemployment. 

Boosting investment will be the major theme of the Chancellor’s statement and the Government needs to show that it is rolling up its shirt sleeves and making real progress in building up the private sector, particularly mid-sized businesses.  It has been widely trailed that the Chancellor will outline how he intends to persuade investors to invest in infrastructure, notably in roads, super fast broadband, rail links, power stations and ports.  The exact nature of the vehicle for funding arrangement is reportedly still being debated by BIS and the Treasury. 

Further details of the Government’s housing strategy are expected, building on the proposal, announced by the Prime Minister on 21st November, for a ‘new build indemnity scheme’ with Government and house builders providing security for loans to first time buyers.  This is one of a number of measures aimed at getting people on the housing ladder.

As well as rising unemployment, inflation is a major issue, with the UK experiencing the highest rate in the EU.  Both issues are causing a rift in the Coalition. September’s Retail Price Index (RPI) is typically used to establish uprating for benefits for the following year and in September 2011 RPI was a 20 year record high of 5.2 per cent.  With wages in the public sector frozen and growing at just 2.5% in the private sector, Osborne has put the case for benefits to be uprated by a (lower) average measure of inflation. This position was derided only a week ago by Business Secretary Vince Cable but reports suggest that Osborne may have won this battle in recent days.

Fuel costs are, as ever, a source of political difficulty (political leaders shudder at the memory of the fuel crisis in 2000) and in a recent parliamentary debate, called in response to an e-petition signed by 110,000 people, MPs approved a motion urging action on fuel prices. Although not binding, it has served to raise the issue of fuel prices to the top of the political agenda.  Potentially the change in benefits uprating could pay for a freeze in fuel taxes.

The crisis in the eurozone will undoubtedly overshadow Tuesday’s announcement.  In the short term uncertainty is arguably convenient for Osborne who will use the crisis, in part, to explain the disappointing growth data. The flight of investors from the euro area to Britain, helpfully bringing down long term interest rates, also supports Osborne’s portrayal of the UK as a safe haven in a storm.

But while all agree that the situation is challenging, there is tension within Whitehall and between the coalition partners regarding the means of securing recovery.  The Chancellor not only has to find policies palatable to both parties, but also motivate departments to all work to the same end: that of creating jobs and growth.

Autumn Statement 2011: What we know now
The centrepiece of the statement will be the outcome of the second stage of the Growth Review. The Chancellor is expected to outline a £50billion housing and road-building programme to be financed by the private investors who will be offered the opportunity to reap the proceeds from tolls, rents and energy bills in return for investment in infrastructure. Coming after yet another review of PFI, the big questions remain: what form will this new model take and will business be willing to invest in it?

The Government has promised ‘real help’ for business in the form of credit easing for mid-sized businesses, the flagship announcement of the Chancellor’s party conference speech.  Details and timeliness are the crucial issues here, with businesses calling for additional support and funds now. 

A compensation package is anticipated for energy intensive industries affected by climate change policies, potentially damaging further the Coalition’s reputation as a Green Government. This announcement follows the Chancellor’s call at the Conservative party conference for Britain to go no slower but also no faster than our fellow countries in Europe in cutting carbon emissions.

The Chancellor is likely to report on progress made in achieving one of the Coalition’s long term aspirations: the simplification of the tax system.  A consultation has recently opened on the merging of NI and income tax and a lower administrative burden potentially opens the door to a cut in taxes.  It is unlikely that the Coalition Chancellor will announce a reduction in the 50% top rate of income tax in the short term.  While this remains an aspiration it is arguably unpalatable in the current climate.


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