George Osborne’s £27bn windfall may not arrive, experts warn

Published: Thursday 26th November 2015 by The News Editor

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The £27 billion windfall that George Osborne took advantage of in his Autumn Statement may not materialise, experts warned ahead of an in-depth analysis of his plans.

The Chancellor used the proceeds of better-than-expected forecast tax receipts and rock-bottom debt interest rates to protect police budgets and fund a partial U-turn over tax credit cuts.

Independent economic think thank the Institute of Fiscal Studies will deliver its assessment of the Chancellor’s policies today, with its director Paul Johnson warning there was only a “50-50” chance of the revenue forecasts remaining as positive for Mr Osborne.

Mr Johnson said the Chancellor had been “quite lucky” but added “the public finance forecasts were not desperately rosy relative to where they were in July” at the time of the Budget and the revisions were “easily within the margins of error”.

He told the BBC: “The risk for him, and this must be at least a 50-50 risk, is that the next time round, or the time after, or the time after, these tax revenue forecasts will look less rosy.”

If that happened, the Chancellor would be forced to either cut spending or raise taxes in order to meet his target of bringing the public finances back into surplus.

The windfall came about because the Office for Budget Responsibility (OBR) decided its old model for estimating VAT revenue was too pessimistic. Income from the sales tax by 2020 is now expected to be some £11.5 billion higher than previously forecast.

The OBR also revised up economic growth predictions – giving the Chancellor an extra £27 billion to play with during this Parliament and making his life considerably easier.

As he delivered his annual Autumn Statement and five-year Spending Review to the House of Commons, Mr Osborne insisted he would still be able to hit his target of eliminating the deficit and achieving a £10 billion surplus by 2020, while reducing the welfare bill by £12 billion over the period.

But he was forced to admit that he will breach his self-imposed welfare cap in each of the next three years as a result of the tax credit U-turn forced on him by last month’s defeat in the House of Lords.

Only one element of the controversial tax credit cuts – a reduction from £5,000 to £2,500 in the amount of extra income a claimant can earn without losing benefits – survives from the Budget in July, when it was predicted to save the Treasury up to £250 million a year.

Mr Osborne imposed a levy on business worth 0.5% of employers’ paybills to pay for three million apprenticeships, but said that all but the biggest 2% of companies will be exempted from the charge.

Other revenue-raising measures included a new 3% surcharge on stamp duty for the purchase of second homes and buy-to-let rental properties, while town halls will be allowed to raise council tax to pay for social care.

Whitehall departments face real-terms cuts averaging 3.3% over the five-year Spending Review period. But if areas such as the NHS, schools, defence and foreign aid – all protected from cuts – are excluded, the average reduction in day-to-day spending is a more daunting 19%, with transport (37%), communities (29%) and the Treasury (24%) worst hit.

However, the Chancellor said there would be a 50% increase in capital investment in transport infrastructure to £61 billion and £2 billion for flood protection, while the science budget would be protected in real terms.

Mr Osborne told MPs that OBR forecasts showed GDP growing “robustly” every year, living standards rising and more than one million extra jobs being created over five years.

The borrowing forecast for this year was cut from £74.1 billion to £73.5 billion, with the Government predicted to achieve a surplus of £10.1 billion in 2019/20 and £14.7 billion in 2020/21.

By 2020, state spending will be reduced to 36.5% of GDP, down from 45% when Labour left office in 2010.

Shadow chancellor John McDonnell questioned whether Mr Osborne would be able to deliver on his package, telling MPs: “Over the last five years there has barely been a target the Chancellor has set he hasn’t missed or hasn’t ignored.”

But Mr McDonnell was mocked after bizarrely producing a copy of Chairman Mao’s Little Red Book and suggesting the Chancellor could learn from the Chinese revolutionary.

Shadow work and pensions secretary Owen Smith said it was a joke that “clearly backfired” but Mr McDonnell was unrepentant, insisting that it had focused attention on his complaints about Government asset sales.

Published: Thursday 26th November 2015 by The News Editor

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