Archives for November 2015

Osborne aka Brown

George Osborne spent much of his early years in Parliament studying Gordon Brown.  The Autumn Spending Review bears many Brownian hallmarks.

First ensure expectations are set low; off-the-record media briefings about the savage cuts that would be required from many departments meant that cuts to the non-protected departments were expected to be about 27% over the life of the Parliament with even the police having to suffer.

Second, use optimistic expectations for the end of the period when, you desperately hope, you will no longer be Chancellor but will be Prime Minister and not seen as responsible for failing to deliver.  In this Osborne has been handed a huge bonus from the Office of Budget Responsibility (OBR) who have, since the summer budget, found him an extra £27bn, based on higher expected tax receipts even though economic growth is not expected to be any greater and lower interest rates on government debt, on the assumption that the BoE keeps rates lower for longer. These assumptions could turn out to be wrong, particularly as they were made before the recent very disappointing public finance data for September which showed much weaker tax revenue than expected.

Third, find several ways to extract more tax from the economy without it creating negative headlines. Parliament has only recently passed legislation preventing the government from raising Income Tax, National Insurance and VAT. There are at least 3 tax increases in this Review. First, the 2% precept that local authorities will be able to charge on top of Council Tax to pay for social care.  The costs of social care are the responsibility of local authorities and the introduction and proposed increases in the National Living Wage mean that these will be a major problem for local authorities, in addition to the rising demand for such services from an ageing population.  Local authorities, rather than the government will take the political flak for this tax increase. Second, there will be a 0.5% Apprenticeship Levy applied to employers payrolls where these exceed £3million, so only the larger companies will pay. Third the increase in stamp duty for second homes and buy-to-let-investors will target those who are clearly well-off.

Finally, in your speech to Parliament, deliver lots of positive surprises to the low expectations you have set so that the news media will appear to be reporting a triumph.  In particular the total withdrawal of the plans to taper tax credits and an increase in spending on the police

This was an Autumn Spending Review that Ed Balls would not have been too unhappy to have given, had he been the Chancellor, albeit he would have run slightly higher deficits one suspects.  If he had it would have been labelled as a ”Tax and Spend” Review – both revenues and spending are about £30bn higher than was expected at the time of the Summer Budget.

There is little impact on UK economic growth and inflation forecasts from the Review, so bond yields and the pound should be little affected.  For some companies with significant labour costs though the Apprenticeship Levy, if the costs cannot be recouped through other cost controls, could be damaging to profits.

As for George Osborne, he will he hoping, in  much the same way that Gordon Brown did that the OBR’s assumptions prove correct, the economy continues to grow, the budget deficit continues to fall, and that he becomes Prime Minister before the next recession appears.