On Wednesday, Chancellor George Osborne presented his long-awaited Autumn Statement and Spending Review. The Spending Review sets departmental spending limits for the next four years and was combined with the annual Autumn Statement, which lays out government taxation and deficit reduction plans for the coming year. They have engendered much protest as they continue the austerity policy that the Tories have vehemently pursued since 2010.
The big surprise was Osborne’s embarrassing backtrack on his plans to cut working tax credits that would have left millions of lower-paid workers much worse off. Credit should be awarded to Labour Opposition leader Jeremy Corbyn for galvanising opposition to Osborne’s proposal which stands out in contrast to interim leader Harriet Harman’s shameful abstaining on the Welfare Reform and Work Bill this past June.
However, the Chancellor is still committed to £12 billion in welfare cuts and the merger of working tax credits and Universal Credit will be going ahead. The Institute for Fiscal Studies (IFS) has argued that although Osborne’s reversal ensures that no family will now take an immediate hit, the long term generosity of the welfare system will be cut just as much as was originally intended because new claimants will now receive much lower benefits than they would have before the recent changes to Universal Credit. The effect will still leave around 2.6 million working families £1,600 a year worse off when the changes go through.
Massive Government departmental cuts, among the largest in post-war history were also announced by Osborne, amounting to £20 billion. Transport was the hardest hit with a 37% cut followed by Communities and Local Government 29%, HM Treasury 24%, Culture, Media and Sport 22%, Energy 22%, HM Revenue and Customs 18% and Business 17%. The only spared departments were defence, policing, foreign aid, education and health. These cuts mean that there will be 100,000 fewer civil servants in 2020 than now, the lowest level since the 1930s.
On the positive side, Osborne has at least recognised a leading concern regarding housing with a big 3% increase on stamp duty for people purchasing second homes. This will bring in a projected £1 billion a year. Osborne is also doubling the house building budget to £2 billion and introducing a London Help to Buy Scheme but many critics believe that his housing measures are not nearly enough and will have little effect on spiralling rent and house prices. It is also worth pointing out that, although the 3% increase on stamp duty on buy-to-let homes may seem like a disincentive to landlords and thus encouraging owner-occupiers, the reality is that the increase will likely be passed onto renting tenants. This is typical of the Chancellor’s short-termism.
Another plus is the £3 billion apprenticeship levy on big business that will help pay for much needed jobs training. But nothing has been done regarding squeezed wages by introducing a genuine Living Wage. Next April’s new minimum wage of £7.20 per hour falls well below a real living wage, calculated at £8.25 per hour and £9.40 in London by the Living Wage Foundation.
Unfortunately but unsurprisingly, Osborne’s corporate tax cutting binge from 28% in 2010, down to 20% and now 18%, has failed to kick-start private sector investment as corporate cash hoarding is at record levels of over half a trillion pounds. Therefore, although the £12 billion road infrastructure investment that was announced is in and of itself much welcome, along with public sector net investment average annual rises of nearly 2% a year. However, the rise pales in comparison to the average annual real growth of 14% achieved by Labour in 1997-2008. Thus, in contravention of leading economic opinion from both the IMF and World Bank, Osborne is missing a tremendous opportunity to boost the UK’s below average OECD productivity and falling living standards through greater investment.
Additionally, in a record year of privatisation that has even eclipsed Thatcher’s best, the great sell off has been augmented further with the controversial announcement that the Land Registry will be sold off. The 150-year-old registry oversees the formal list of what person or company owns land in England and Wales. The New Economics Foundation (NEF) has argued that it is an extremely poor candidate for privatisation because it generates an annual dividend and provides legally mandated services where no competitor exists and therefore could be used to extract economic rent. Any economist will point out that privatizing a monopoly industry leaves it rife to extortionate price increases, for customers cannot go elsewhere.
As for students, Osborne retroactively froze the £21,000 income threshold for at least five years on student loans taken out since 2012. The Coalition government actually promised that the threshold would be raised each year in line with average earnings when the student loan system was originally launched in 2012. Consequently, this means that student and graduate repayments will now be higher to the tune of £306 a year. The change has been criticised by many including personal finance expert Martin Lewis, who called it a “disgraceful move and a breach of trust by the government that betrays a generation of students.”
Osborne claims his austerity measures are designed to reach a budget surplus by the next election in 2020, in order to attain long-term economic security for Britain. However, as many of the UK’s leading economists have recently written, his plan has no basis in economics. His surplus goal merely provides cover for more cuts and sell-offs to achieve his real ideological goal of a much smaller state. State spending as a proportion of total GDP has already fallen from 45% in 2010 to 40.9% and this Spending Review will lower it further to 36.5%. As Shadow Chancellor John McDonnell has pointed out, this plan to erode the state will further stifle investment and likely leave the economy more vulnerable to economic shocks. Already soaring inequality will also likely increase, due to the Government’s reduced ability to help mitigate it through redistribution.
The Autumn Statement and Spending Review were a tremendous wasted opportunity for the UK to reverse the damaging path of austerity that is inhibiting its demand-deficient economy and leaves millions much worse off financially.
The official Spending Review and Autumn Statement is available at: https://www.gov.uk/government/publications/spending-review-and-autumn-statement-2015-documents/spending-review-and-autumn-statement-2015
Matthew Polacko, Business & Economics Editor