(Final Update) Autumn Statement: Osborne benefits from forecast increases

In his autumn statement to parliament on Wednesday, Chancellor George Osborne said he would continue to reduce the deficit, increase spending and make a big U-turn on tax credits, thanks to improved growth and tax forecasts.

Making his first spending review since 2010, Osborne said he would deliver both his promised £12bn of welfare savings and a budget surplus by 2019-20.

Citing forecasts from the Office for Budget Responsibility, Osborne said GDP would grow by 2.4% in 2015-16 and by a faster than expected 2.5% in 2016-17, before falling to 2.4% in 2017-18 and 2.3% in 2019-20.

He added that the UK would also borrow £8bn less than forecast, "fixing the roof while the sun is shining".

Public sector net borrowing is forecast to fall to 3.9% of GDP in 2015-16 and then to fall each year for the remainder of the forecast period. Public sector net debt, having been forecast in July to be 83.6% of GDP, is now expected to be 82.5% this year and to fall to 81.7% in 2016 and reach 71.3% in 2020-21 on current projections.

Economists said Osborne's appearance of being able to "achieve the impossible" of upping spending and reducing the deficit was to a large extent due to the OBR's more optimistic view on prospects for tax receipts, which was a key reason behind borrowing figures being some £27bn less than expected over the parliament as a whole, and £8bn per annum less by 2020-21.

Increased tax receipts will be boosted by revenue-raising measures including higher stamp duty for those buying and selling second homes and buy-to-let properties, together with a new Apprenticeships Levy that will be set at 0.5% of payroll and apply to firms employing over 150 employees. It is hoped the levy will raise £3bn a year and fund 3m apprenticeships.

Welfare, housing and NHS boosts

With more room to play with, Osborne was able to make a giant U-turn on his controversial tax credit cuts, alongside an increased state pension, measures to support the housing sector and rejigging of the NHS finances.

The Chancellor's housing market measures included support for the market, via a £2.3bn funding pledge and reform of the planning laws towards delivering 400,000 affordable housing starts by 2020-21, plus an extension of the Help-to-Buy and shared ownership schemes, a new London Help-to-Buy scheme, and higher stamp duty for those buying and selling second homes and buy-to-let properties.

In recognition of higher housing costs in the capital, the new London Help-to-Buy scheme will offer buyers with a 5% deposit a 40% equity loan, interest-free for five years.

On the NHS, spending in England will be upped by £10bn per year more in real terms by 2020-21 compared to 2014-15, but this comes with a demand that the service finds £22bn of efficiencies. Under the weight of considerable objection from the public, the House of Lords and his own back benches, the Chancellor said his previous proposal to cut tax credits will be put off until 2020.

Other areas to receive a boost included transport infrastructure, where the Department for Transport will have its operational budget cut by 37% but will dole out £46.7bn of capital investment over the next five years, including "the biggest road improvement programme since the 1970s and the largest programme of rail investment since Victorian times" as well as £250m for a new "pothole fund".

Reaction

Analysing the statement, Martin Beck, senior economic adviser to the EY ITEM Club, said Osborne had only one big surprise: the decision to scrap the planned cuts to tax credits entirely.

"Overall, Chancellor’s announcements will deliver a small net fiscal boost to the economy next year of around £6bn, or less than 0.3% of GDP, mainly through the preservation of tax credits. But this largely disappears over successive years as the effects of tax rises (a new apprenticeship levy and bigger rises in council tax) kick in. And while we heard little about it today, the economy still faces the drag from a major fiscal squeeze over the next four years.”

Capital Economics agreed that a "big new wave of austerity" is still set to hit next year, which will slow the recovery in 2016, but that the economy is relatively well-placed to weather this squeeze.

The research outfit's Chief UK economist Vicky Redwood said the "surprising" improvement in the OBR’s public borrowing forecasts had saved the Chancellor’s bacon, with “modelling changes” seemingly boosting tax receipts and allowing him to scrap the tax credit cuts and still adhering to his fiscal rules to achieve a surplus.

"Abstracting from the impact of bringing housing association borrowing into the public sector, borrowing is some £27bn less than expected over the parliament as a whole, and £8bn per annum less by 2020/21," she said. "Even taking into account the housing association change, the forecast for annual borrowing in 2020/21 has fallen by about £3bn."

The market's reaction was muted on Wednesday as analysts and economists digested the effects on companies.

"The lack of concrete reaction in the market is a sign, perhaps, that most investors are quite happy with the maintenance of the UK economy and its recovery," said Chris Beauchamp at IG.

"Housebuilders shares are off the highs of the session, as some of the pre-statement exuberance is trimmed back, since the chancellor was unlikely to unveil anything that would stoke runaway house price inflation. "

The Council of Mortgage Lenders cautioned that additional stamp duty on buy-to-let transactions, coming as it does, hot on the heels of the forthcoming tax changes to landlords already announced, could have unintended consequences on the private rented sector, which accounts for around a fifth of the population.

Others in the property industry agreed. The Royal Institution of Chartered Surveyors warned that a push towards affordable home ownership was perhaps coming at the expense of affordable homes for rent.

“George Osborne is essentially subsidising one sector of the housing market over all others, home buyers already benefit from significant government funding. Many people struggle to afford to own their own homes and a large majority rely on the available supply of affordable rents. The Chancellor may feel that he is supporting the under-privileged by pushing up buy-to-let Stamp Duty, but we would argue that such an inflationary measure will discourage small landlords and reduce the rental supply – prices will inevitably rise."