Schroders Quickview: Mini pre-election giveaway
With just over five months to go until the general election, today’s Autumn Statement was the Chancellor’s penultimate opportunity to showcase both the public finances and the macroeconomic outlook to the electorate.
A relatively strong UK economy
Starting with the economy, the Chancellor crowed about the relative strength of the UK’s recent performance, especially when compared to the eurozone. Osborne took great pleasure in comparing GDP growth in the UK to that of France, given the difference in approach applied to dealing with austerity.
Chancellor George Osborne is not able to hide the deterioration in the public finances, and is heavily relying on spending cuts after the election in order to put things back on track.
The Office for Budgetary Responsibility (OBR) has revised up its forecast for real GDP growth in 2014 and 2015, but revised down its growth expectations from 2016 onwards. The OBR forecasts 3% growth in 2014, followed by 2.4% in 2015, 2.2% in 2016 and slightly above in the following years. The OBR expects household consumption to accelerate in 2015 before easing in subsequent years, with a similar profile built in for both business and government investment. However, given the austerity assumed, general government current spending is expected to contract from 2015 onwards. Also, the weak outlook for the UK’s export destinations leads the OBR to assume that net trade will make a negative contribution in 2015, before returning to a neutral contribution from 2016 onwards.
Compared to the Schroders forecast, the OBR is slightly more negative for the rest of 2014 and 2015, but is more optimistic from that point onwards. This may be due to the higher forecast the OBR has for external markets (like the eurozone), or due to the smaller impact factored in from austerity.
Borrowing heading in the wrong direction
In terms of the public finances, public sector net borrowing on a like-for-like basis is estimated to be £8.7 billion higher over the forecast horizon. There have been several definition changes including a move to new accounting standards, but the OBR has helpfully provided the like-for-like comparison which shows that the borrowing is heading in the wrong direction ahead of the general election. Indeed, based on the latest proposed changes, just over £1 billion will be given away in tax cuts and spending increases in the next financial year. This is offset by the banking fines imposed earlier this year, which will be spent on GP services over the following four years. Note, according to the OBR, the extra £295 million of NHS spending will end in 2019/20, and is not permanent as the Chancellor claimed over the weekend.
The policy changes put forward in the Autumn Statement are in aggregate expected to raise about £1.2 billion. However, the vast majority of the fiscal tightening has been back-dated to after the general election - one of the oldest tricks in the book.
More policy changes than expected
In terms of policy, the biggest change is the introduction of a tiered/marginal stamp duty tax on residential property, replacing the previous step-change system. While this will annoy the vast majority of recent homebuyers, going forward, about 98% of properties which are worth less than £937,000 will benefit from a discount. Properties that are more expensive will end up paying more. We think this is a very sensible and long overdue change to the system, which created significant distortions in the housing market at certain price points.
Other measures include:
• A 25% tax on diverted profits, which is aimed at multinationals that take advantage of foreign low tax countries
• Bank profits which can be offset by losses for tax purposes to be limited to 50%
• Abolition of air passenger duty for children
• Confirmation of the abolition of the 55% ‘death taxes’ on guaranteed annuities. ISAs and the allowance will also be passed on to spouses
• Basic rate income tax threshold to be raised by an extra £100 next year. Higher rate income tax threshold to be raised to £42,385 next year.
• More money for roads, flood defences, railways, and the theatre and art venues.
• More support for exporters, small businesses and companies employing apprentices.
Overall, the Chancellor managed to make more changes than expected given the lack of fiscal wiggle room. However, he is not able to hide the deterioration in the public finances, and is heavily relying on spending cuts after the election in order to put things back on track. The OBR assumes total managed government expenditure to fall from 40.5% at the end of this year to an eye-watering 35.2% by 2019-20 – the lowest figure since 1948! We think this may be a step too far, and there is a high chance that the next government will have to pass on some of the burden to tax payers. Either that or the next government must be willing to look at making cuts to the biggest burden on the state: the NHS and state pension system.