From striver alert to future cuts: five things to expect from the Autumn Statement

A few insights from Gavin Kelly to help you navigate Osborne's fiscal arithmetic.

In the Autumn Statement there will be a blizzard of facts, figures, assertions and counter-assertions. There have been a few helpful pointers on what lto ook out for (try this and this), and I’ve already given my tuppence worth on what may happen to the faltering fiscal rules. But here are a few further insights to bear in mind.

First, be on striver alert. Expect plenty of warm words about "do-ers and grafters" who get up and work hard on modest means. In a different part of the Chancellor’s speech there will be tough messages and measures for those working age families who receive tax credits and benefits. Not for the first or last time the impression will be given that these are two distinct groups inhabiting different moral and economic worlds. They aren’t. Three quarters of tax credits go to working households. If reports about capping tax credit increases at 1 per cent are correct then so-called strivers are about to be squeezed too. 

Second, there will be new news on wages – and the longevity of the squeeze. Buried in the OBR report there will new estimates for what is expected to happen to wages and inflation until 2018. In terms of the economics, and politics, of living standards from now until the election this is key data. Given that the OBR’s forecast for growth in 2013 is very likely to be marked down (from rosy 2 per cent figure it set in March) the assumption for earnings may well also fall. Also, for those who want to get inside the numbers, be warned that the figures the OBR uses tend to be a bit optimistic as they are based on the mean rather than typical (ie median) wage.

Third, watch out for childcare. Given the size of the cuts that are coming down the path you might not expect any new areas of spending. But if there is to be any (outside of new capital investment – or more accurately a slowing down of the rate of infrastructure cuts) then childcare may be a beneficiary. Measures to help with childcare costs would support employment, speak to concerns over the cost of living, and be a nod to the Coalition’s woes with some women voters. In terms of what might actually get announced there is likely to have been a lively internal debate. On the one hand, there are those who favour introducing tax-relief – a slightly saloon bar approach - which will inevitably favour the better off (and which has been skewered by my colleague James Plunkett). Against this are those who would like to build on the 15 hours of free guaranteed pre-school childcare. This latter approach would be a step in the right direction and do something to reduce the shocking disincentives to work that many second earners face in low and middle income families. That said, the government may want to hold any such announcement back to the New Year when its Childcare Commission reports.

Fourth, there is the widely anticipated raid on pension tax relief for the affluent. The briefings are that around £1-1.5bn might be raised by lowering the annual limit on pension contributions from £50k to £30k. If so, be ready for a bit of a storm from the well-organised pensions lobby. But bear in mind that tax-relief is highly regressive and very expensive. It is indeed remarkable that the support for higher rate tax payers has been so protected given some of the cuts being made – some of the claims about these measure hammering "middle-earners" are very overdone.

Even so, there are better ways of cutting tax-relief for the affluent than restricting the annual limit: the lifetime allowance for tax privileged pension contributions should be cut instead. Bringing it down from £1.5m to £1m would raise up to £1.5bn (to put this perspective note that the typical size of annuity purchased is £25k). It’s also the case that those who say that this salami slicing of pension tax relief is destabilising for savers have a point: the government should work out once and for all how much it wants to raise from pension tax relief in this Parliament and then draw a line. And when it does this, it should bear in mind that it still needs to find the billions to pay for the final increase in the personal tax allowance to £10k before 2015.

Finally, care needs to be taken in adding up the scale of the future cuts. The briefing by the IFS on Thursday lunchtime will provide the definitive view on this. But if a figure is revealed for new cuts that need to be made in 2017/18 (because the structural deficit gets pushed back by another year) then bear in mind that this will be on top of a pile of other cuts – roughly £23bn - that have already been pencilled in for 2015/16 and 2016/2017 but are yet to be allocated. Osborne is accumulating an ever larger mountain of fiscal misery to be dished out between departments and welfare spending. For a guide to this unpleasant fiscal arithmetic you won’t do better than reading this from the IPPR and this from the SMF.

But also bear in mind, that if the OBR decided at some future date to change its assumptions about the amount of spare capacity in the economy, and therefore the size of the structural deficit, then all of these numbers would be greatly affected. In which case there would be probably be a need for another Autumn Statement.

 

George Osborne. Photograph: Getty Images

Gavin Kelly is a former adviser to Downing Street and the Treasury. He tweets @GavinJKelly1.

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What is the EU customs union and will Brexit make us leave?

International trade secretary Liam Fox's job makes more sense if we leave the customs union. 

Brexiteers and Remoaners alike have spent the winter months talking of leaving the "customs union", and how this should be weighed up against the benefits of controlling immigration. But what does it actually mean, and how is it different from the EU single market?

Imagine a medieval town, with a busy marketplace where traders are buying and selling wares. Now imagine that the town is also protected by a city wall, with guards ready to slap charges on any outside traders who want to come in. That's how the customs union works.  

In essence, a customs union is an agreement between countries not to impose tariffs on imports from within the club, and at the same time impose common tariffs on goods coming in from outsiders. In other words, the countries decide to trade collectively with each other, and bargain collectively with everyone else. 

The EU isn't the only customs union, or even the first in Europe. In the 19th century, German-speaking states organised the Zollverein, or German Customs Union, which in turn paved the way for the unification of Germany. Other customs unions today include the Eurasian Economic Union of central Asian states and Russia. The EU also has a customs union with Turkey.

What is special about the EU customs union is the level of co-operation, with member states sharing commercial policies, and the size. So how would leaving it affect the UK post-Brexit?

The EU customs union in practice

The EU, acting on behalf of the UK and other member states, has negotiated trade deals with countries around the world which take years to complete. The EU is still mired in talks to try to pull off the controversial Transatlantic Trade and Investment Partnership (TTIP) with the US, and a similar EU-Japan trade deal. These two deals alone would cover a third of all EU trade.

The point of these deals is to make it easier for the EU's exporters to sell abroad, keep imports relatively cheap and at the same time protect the member states' own businesses and consumers as much as possible. 

The rules of the customs union require member states to let the EU negotiate on their behalf, rather than trying to cut their own deals. In theory, if the UK walks away from the customs union, we walk away from all these trade deals, but we also get a chance to strike our own. 

What are the UK's options?

The UK could perhaps come to an agreement with the EU where it continues to remain inside the customs union. But some analysts believe that door has already shut. 

One of Theresa May’s first acts as Prime Minister was to appoint Liam Fox, the Brexiteer, as the secretary of state for international trade. Why would she appoint him, so the logic goes, if there were no international trade deals to talk about? And Fox can only do this if the UK is outside the customs union. 

(Conversely, former Lib Dem leader Nick Clegg argues May will realise the customs union is too valuable and Fox will be gone within two years).

Fox has himself said the UK should leave the customs union but later seemed to backtrack, saying it is "important to have continuity in trade".

If the UK does leave the customs union, it will have the freedom to negotiate, but will it fare better or worse than the EU bloc?

On the one hand, the UK, as a single voice, can make speedy decisions, whereas the EU has a lengthy consultative process (the Belgian region of Wallonia recently blocked the entire EU-Canada trade deal). Incoming US President Donald Trump has already said he will try to come to a deal quickly

On the other, the UK economy is far smaller, and trade negotiators may discover they have far less leverage acting alone. 

Unintended consequences

There is also the question of the UK’s membership of the World Trade Organisation, which is currently governed by its membership of the customs union. According to the Institute for Government: “Many countries will want to be clear about the UK’s membership of the WTO before they open negotiations.”

And then there is the question of policing trade outside of the customs union. For example, if it was significantly cheaper to import goods from China into Ireland, a customs union member, than Northern Ireland, a smuggling network might emerge.

 

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.