Autumn Statement: Was George talking Balls?

In a neat bit of cloth-stealing, the Chancellor sounded very Brownian in the Autumn statement today. Unfortunately, for the UK, this means higher borrowing for a while longer

George Osborne alongside Ed Balls
Simon Miller
On 29 November 2011 16:03

It is always useful to carry an umbrella no matter how many holes are in it and that is certainly the case of the UK with the sovereign debt storm.

And we certainly do have a lot of holes in our umbrella. Borrowing up, growth down, net debt continues to rise.

It was slightly surreal seeing Brownian politics come out of the mouth of Chancellor George Osborne; little micro-economic initiative here, micro-initiative there, fiddle and poke.

But it is obvious that on political terms, Osborne had to do something different. With recovery well past the election year now, Osborne will be hoping that these measures will begin to bear fruit by 2015 and at least he hasn’t followed brown in spending everything – kind of.

Here’s the bad news, net debt is set to rise from 60.5 percent of GDP to 78 percent in 2014-2015 before a slight fall to 77.7 percent the year after.

Borrowing is set to be 158 billion this year. With growth flatlining and unemployment growing, this figure is not a surprise. The good news is that this is forecasted to drop to £24 billion – although like weather forecasts it would be good to keep a brolly with you in five years’ time. 

Osborne had a lucky escape with the Office for Budgetary Responsibility. When he set a target for structural deficit cuts he didn’t count on the massive downturn that has occurred – so as the economy slumps, spending goes up – and hence the changes in spending plans. Somewhere post the next election, Osborne will have to find more public sector cuts to satisfy the OBR’s forecast of eliminating the structural deficit.

Of course the issue is that we are on a knife edge with the OBR expecting an increase in spending in the private sector, increasing output and jobs. If this doesn’t happen, the numbers don’t stack. It is that tight.

The good thing about these mini-budgets is that there is always room for some quite astonishing behaviour. For instance, when are politicians going to realise that when you play with tax payers’ money, they will eventually hope to get some measure of benefit out of it?

Exactly what signal does it send to those low-waged, hard-working sods that their tax credit will essentially be cut (when you take into account inflation) and yet they see the unemployed get an uplift of 5.2 percent? Indeed, when are we going to see the promised simplification of tax? Instead of giving a bit of our money back to us, here’s a simple idea: take less.

If you want to restore confidence, the easiest way is to let people keep more of their money. Take people out of the 20 percent band, lower other taxes and money will be there for people to spend. If you are going to spend billions of pounds in borrowing, that’s the way to do it, and it is simple and quick. The effects are seen in the next pay packet.

Another bizarre decision was to cap the public sector wage scaling by one percent.

Oh don’t get me wrong, I find it ridiculous that the public sector gets this when they complain about pay freezes. But you do wonder what type of thinking is going on in the Treasury and Number 10.

With the end to collective pay bargaining (hooray) also included in the statement and a strike tomorrow by public sector workers, you do wonder whether the government is trying to provoke an almighty dust-up with the unions. Either that or it is trying to provoke more strikes - hey, it saves around £1 million a day in wages for the government, quite an effective deficit reducer. Do your bit for your country; strike!

Anyway, I digress. Looking through the figures there is also more doom and gloom for those who remain steadfastly non-puritan. Smokers are expected to see their tax contributions go from 9.1 billion to 10.6 billion five years later but wine buffs will give £3.1 billion this year, going up to £4.9 billion in 2016.

So what will the reaction be in the financial sector?

So far the bond rate is pretty stable with UK 10-year yielding at 2.24 at 15.30GMT and the FTSE trading up.

However, although it was good to hear Osborne talk about the refusal to allow the financial transaction tax to be implemented in the UK, there was a nice little hit on banks.

Despite saying that the UK Bank levy was intended to alter banking behaviour, it is increasingly clear that it is being used as a revenue generator. To maintain the £2.8 billion income from the levy, it is being raised by 10 percent to 0.088 next year. Now, intriguingly, if you look at the Treasury’s income predictions, this figure will rise to £2.9 billion in 2016. Not a revenue generator? Then why is it going up?

Banks, such as HSBC, will rightly point out that they were respectable and this is just punishing the good ones. Good politics, but with the financial sector already concerned about attitudes towards the City from Westminster, is it wise to hit them again considering the importance it has to the UK economy?

All in all, my initial feeling is that it was a bit of a curate’s egg. Events outside the UK will determine whether Osborne’s plan works, but at least it is a plan – albeit far too much Rooseveltian capital projects for my liking – unlike Ed Balls.

Watching his reply to the Autumn statement, I gather that Balls objected to the government borrowing and insisting that it should have been slower in introducing cuts, which would have meant more borrowing.

Balls by name…

Simon Miller is the Editor of Financial Risks Today. He tweets at @simontm71 

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