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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Why Theresa May can't end speculation of an early general election

Both Conservative and Labour MPs regard a contest next year as the solution to their problems. 

One of Theresa May’s first acts as a Conservative leadership candidate was to rule out an early general election. After a tumultuous 2015 contest and the EU referendum, her view was that the country required a period of stability (a view shared by voters). Many newly-elected Tory MPs, fearful of a Brexit-inspired Ukip or Liberal Democrat surge, supported her on this condition.

After entering Downing Street, May reaffirmed her stance. “The Prime Minister could not have been clearer,” a senior source told me. “There won’t be an early election.” Maintaining this pledge is an important part of May’s straight-talking image.

But though No.10 has wisely avoided publicly contemplating an election (unlike Gordon Brown), the question refuses to die. The Conservatives have a majority of just 12 - the smallest of any single-party government since 1974 - and, as David Cameron found, legislative defeats almost inevitably follow. May’s vow to lift the ban on new grammar schools looks to many like an unachievable task. Former education secretary Nicky Morgan and former business minister Anna Soubry are among the Tories leading the charge against the measure (which did not feature in the 2015 Conservative manifesto).  

To this problem, an early election appears to be the solution. The Tories retain a substantial opinion poll lead over Labour, the most divided opposition in recent history. An election victory would give May the mandate for new policies that she presently lacks.

“I don’t believe Theresa May wishes to hold an early election which there is evidence that the country doesn’t want and which, given the current state of the Labour Party, might be seen as opportunistic,” Nigel Lawson told today’s Times“If, however, the government were to find that it couldn’t get its legislation through the House of Commons, then a wholly new situation would arise.”

It is not only Conservatives who are keeping the possibility of an early election alive. Many Labour MPs are pleading for one in the belief that it would end Jeremy Corbyn’s leadership. An early contest would also pre-empt the boundary changes planned in 2018, which are forecast to cost the party 23 seats.

For Corbyn, the possibility of an election is a vital means of disciplining MPs. Allies also hope that the failed revolt against his leadership, which Labour members blame for the party’s unpopularity, would allow him to remain leader even if defeated.

Unlike her predecessors, May faces the obstacle of the Fixed-Term Parliaments Act (under which the next election will be on 7 May 2020). Yet it is not an insurmountable one. The legislation can be suspended with the backing of two-thirds of MPs, or through a vote of no confidence in the government. Alternatively, the act could simply be repealed or amended. Labour and the Liberal Democrats, who have demanded an early election, would struggle to resist May if she called their bluff.

To many, it simply looks like an offer too good to refuse. Which is why, however hard May swats this fly, it will keep coming back. 

George Eaton is political editor of the New Statesman.