Britain’s triple-A credit rating was under threat on Wednesday night after George Osborne conceded one of his key public finance targets would be missed and official forecasts dashed his hopes of fighting the election on the back of a revived economy.
In an Autumn Statement that took from the rich and working-age benefit recipients to ease the pain on motorists and middle-income workers, the chancellor also had to concede a sharp deterioration in economic prospects and new holes in the public finances.
Although the chancellor said “Britain is on the right track”, the Office for Budget Responsibility slashed its forecasts for the next five years, forecasting that output would recover to its pre-crisis peak only at the end of 2014, shortly before the next general election.
Weaker growth will force the government to borrow more in every year, once a series of one-off Treasury initiatives which flatter the borrowing figures are stripped out. The effect of weaker official growth forecasts increases debt by £105bn by 2016-17, making it impossible to hit Mr Osborne’s target to reduce the share of public debt in national income by 2015-16.
Mr Osborne chose not to raise taxes or cut public spending to hit the target, prompting concern from one credit ratings agency that the government’s commitment to sort out the public finances was slipping.
Fitch, the ratings agency which had already put the triple-A rating on “negative outlook” in March, said “missing the target weakens the credibility of the UK’s fiscal framework, which is one of the factors supporting the rating”.
Mr Osborne’s statement contained the seeds of the sombre message that both Tories and Liberal Democrats will take into the next election. In a phrase borrowed from Barack Obama, the chancellor said: “It’s a hard road but we’re getting there.”
Robert Chote, head of the OBR, said: “What’s striking is the weakness of the recovery over an extended period of time.”
The statement was intensely political, pushing off additional net cuts until 2018 – well beyond the election – and pulling together a short-term package which rewards “striving” working families and business.
The cancellation of the planned 3p a litre rise in fuel duty and a further £235 in the tax-free personal allowance will help most families, while corporation tax will be cut to 21p - one of the lowest rates in the world - and capital allowances will be increased.
Mr Osborne paid for this limited handout by targeting welfare claimants, the rich and Whitehall civil servants.
Most working age benefits will rise by only 1 per cent a year for the next three years - below the rate of inflation, raising £3.7bn a year by 2015/16. Liberal Democrat officials say they would have backed bigger savings, if David Cameron had not vetoed a mansion tax.
Instead Mr Osborne hit the rich through their pensions. He claims that only the richest 1 per cent would be hit by a cut in the annual pension contribution allowance from £50,000 to £40,000, although better-off public sector workers will be affected.
Banks were excluded from benefiting from the cut in corporation tax and Mr Osborne also tweaked the bank levy upwards – as in previous years – to keep its yield stable at £2.5bn.
Meanwhile Mr Osborne is targeting a further £10bn of cuts by Whitehall departments in 2015/16 and wants them to emulate the cuts made by Michael Gove’s education department, where 1,000 jobs are going in a drive to cut the administration budget in half.
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