Might Future Autumn Statements Bring Greater Cuts in Welfare Spending?

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By Graeme Mackay | December 18, 2012 4:02 AM EST

George Osborne, Britain's Chancellor of the Exchequer, has often of late made reference to the fact that the Coalition Government has already reduced the country's Budget Deficit by a quarter since coming to power.  Concentrating on Deficit reduction has not been politically comfortable for the Government with the opposition Labour Party being usually ahead in the opinion polls since late November 2010 - it didn't take long - and a ComRes survey for The Independent at the end of October 2012 put Labour on 44 per cent, the Conservatives on 33 per cent and the Liberal Democrats dropping to 12 per cent.

Is it possible that the gloomy prediction made by Bank of England Governor Mervyn King will inevitably become fact?  Mr King, whilst attending a private lunch shortly before the 2010 General Election, is alleged to have commented to the American economist David Hale that: "...whoever wins this election will be out of power for a whole generation because of how tough the fiscal austerity will have to be..." 

On 05 December 2012 the Chancellor made his Autumn Statement to the House of Commons but although it was laced with some gruel, it was not the doom and gloom that many had predicted and certainly better than Her Majesty's Opposition had anticipated  Yes, growth projections are poorer than those predicted only in the Spring and the Office for Budget Responsibility (OBR) suggests that Britain's Gross Domestic Product (GDP) will contract by 0.1 per cent this year so the economy is still flatlining at best.  Real growth is expected to return by the middle of next year, though again by three-quarters of a percentage point less for each of the following three years and could possibly reach a less-than-spectacular 2.4 per cent by the time of the General Election in 2015, though much depends on Europe sorting out the crisis affecting the Eurozone, a pick-up in the USA and a halt in China's slowdown.  Best keep fingers crossed!

Easing the Chancellor's task of being the messenger of bad tidings, was an assumed windfall of £3.5 billion from the sale of 4G spectrum rights.  This is the sale by auction of fourth Generation superfast mobile phone/tablet internet access announced, after initial delays, by Ofcom in late July this year following the switch off of the UK's analogue television signals on 800 MHz.  There is also a 2.6 GHz frequency band for extra mobile capacity in urban areas.  Bidding finally got underway on 11 December but that £3.5 billion is by no means guaranteed.  Milan Sallaba, Head of Telecoms Strategy Advisory at KPMG pointed out as bidding got underway - final outcomes should be announced early January 2013 - that:

"In Germany the auction took place in 2010...(and) went for less than £50 per capita...this would suggest a total windfall of £3 billion for the UK Government."

On a more positive note however, the Government will be heartened by the highly successful auction of the 4G spectrum rights concluded by the Dutch Government on Friday 14 December which raised €3.8 billion when only about €500 million had been anticipated.  Reporter Maarten van Tartwijk for 4-Traders said that all 41 frequencies on offer were sold to four telecom firms: UK's Vodafone PLC; Netherlands' Royal KPN NV; Germany's Deutsche Telekom AG and Sweden's Tele2 AB.

Further income but on a firmer footing and longer duration, will be the interest on the Quantitative Easing bonds held by the Bank of England which Mr Osborne has instructed the Bank to return to the Treasury.

Raising the threshold at which the top rate of (income) tax is paid by a below inflation one per cent is designed to bring in a little over £1 billion by the end of this Parliament and another billion will be saved by the reduction on tax-free contributions into a personal pensions plan from £50,000 to £40,000 per annum.  Likewise, the lifetime tax-free fund worth is reduced from £1.5 million to £1.25 million.  A billion here, a billion there, when Government spending in the current financial year is expected to be over £710 billion?  Desperate times and every little helps!

Probably the single biggest saving to be announced in the autumn Statement and the one which raised an eyebrow or million, was the Chancellor's decision to restrict the increase in welfare payments of working-age households to a below inflation one per cent (inflation expected to rise by double that amount) for the three years commencing April 2013.  This decision was taken on the premise that average pay for those in work has been rising by little more than this - about 1.3 per cent - and that those working should not be at a disadvantage to those not.  Hard?  True but polls show that this is not unpopular with the electorate and although it raises criticism from Labour the flak tends to be muted.  The key word to note is "working-age"; maybe so as not to alienate the "Grey Vote", Pensions will rise by 2.5 per cent.  The restriction though will soon make notable savings and these should be worth about £4 billion a year by 2015.

Britain's Budget Deficit was running about 7.7 per cent in the last financial year  and should turn out at 6.9 per cent in the current year with a slow grind ahead to an estimated 3.1 per cent by 2016-17.  Yes, that's in the next Parliament which, unless the Government's political fortunes improve significantly, will be a Labour one with a majority in the region of 120.  The OBR thinks that by then the Government's Current Budget - the one for day-to-day running - will be in surplus by one per cent of GDP.  Not so good is the ratio of net public debt to GDP which is expected to peak in the tax year 2015-2016 at 80 per cent of GDP.

Beloved of all governments no doubt, Moody's and Fitch had already put the UK on negative outlook earlier in 2012.  After Mr Osborne in his Autumn Statement admitted that the ratio of net debt to GDP would not decrease until 2016-2017, Standard & Poor followed suit and put the UK credit rating on negative outlook (though still retaining its AAA) on 13 December.  S&P warned:

"The outlook revision reflects our view that we could lower the ratings on the UK within the next two years if fiscal performance weakens beyond our current expectations.

"We believe this could occur in particular as a result of a delayed and uneven economic recovery, or a weakening of political commitment to consolidation."

There will be a one per cent reduction in corporation tax to 21 per cent which will help businesses and the personal tax-free allowance is to rise to £9,440 which should help reduce the effects of that below inflation increase on working-tax credits.  Five billion has been found for public investment projects over the next two years.  All this should ensure that the economy will not slip back in to recession but its anybody's guess as to whether it will improve the Government's fiscal performance.  With the credit agencies now all putting Mr Osborne on a caution and expecting a good show for the Budget in March 2013, it is difficult to see any other path but to start seriously reducing  Britain's £232 billion "Benefits/Social Services" bill.  Political consequences be damned!!?  

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