The Chancellor’s Autumn Statement, due on Wednesday, was always going to be the centre of attention. He has to show where roughly £24bn of unprotected departmental spending cuts will fall during this parliament, along with £12bn of welfare savings. While events and the House of Lords have not been kind to the Chancellor, he has fallen into a trap, entirely of his and the government’s own making. The situation is not irretrievable, but it will require pragmatism, which he does not lack, to trump ideology, which he has in abundance.
The trap arises from unnecessary political commitments. These include the commitments to a budget surplus of £10bn by 2019-20, and in "normal times" thereafter; to keeping higher income tax, VAT and National Insurance (Class 1) rates off-limits; and to the ring-fencing of NHS, education, international aid, and importantly, pension expenditures.
Backtracking on any of these is going to cost political capital and generate the mockery of opponents. Yet sooner or later, the Chancellor is going to have to ride this particular tiger, and make some tough choices as the commitments risk becoming hostages to fortune. How so?
First, the Chancellor’s budget surplus strategy could be blown off course by even a small shortfall in economic growth; higher than expected inflation; or a serious shortfall in tax revenues. All of these are likely to loom a little larger in the coming year, though none looks overly threatening at the moment. The economy should continue to grow at around 2.2-2.4 per cent but emerging markets, including China, are now in a sort of growth hiatus and do pose an external risk. A bigger risk to the economy may arise if a majority of UK voters chose to leave the EU in next year’s referendum. To deal with such shocks, the Chancellor needs to be flexible in ways that he has rejected.
Second, the higher taxes ruled out by the government comprise about 64 per cent of total receipts of about £600bn in 2014-15. It’s unlikely this will change, though the Chancellor could raise non-Class 1 NI rates (ie not on regular employment). Of many other tax items, the largest are corporation tax, which is due to come down to 18 per cent by 2020, council tax, business rates, fuel duties, and stamp duty. Stamp duty revenues are well down on last year following the higher rates on more expensive properties, but fuel duties could well catch the Chancellor’s eye, especially in view of the sharp fall in oil prices and this year’s news on diesel fuel.
He is likely also to raise revenues from other sources, and could even explore the myriad of tax reliefs that amount to about £100bn, according to barrister and tax expert, Jolyon Maugham. The Office of Tax Simplification, which is a part of the Treasury, lists 1156 tax reliefs. It shouldn’t take a genius to establish that there must be a few billion pounds to be had here, while maintaining the most economically and socially important reliefs.
Third, trickiest of all are spending cuts. According to the Institute for Fiscal Studies, further departmental cuts in this parliament of 18.8 per cent will come on top of the 20 per cent reduction already implemented since 2010. This is a gruelling enough problem, but all the more so in view of the Paris terrorist attacks, which have already given rise to calls for increased spending on security, communications and surveillance, the military, and the police. The government simply cannot be seen to falter here, especially since it wants to hold the sword to Corbyn’s Labour on these matters, the latter having offered an easy target.
The Chancellor is also expected to announce, among many other things, how he plans to soften, implement or amend the £4.4bn of tax credit cuts, which the House of Lords recently ruled the government can’t enact as planned. That’s a third of proposed welfare cuts. Somehow, the Chancellor will have to make good in this area, and also assure that the probable overshoot of this year’s £69.5bn target for public borrowing—it could be anywhere between £3-10bn—is just a hiccup.
There are two things the Chancellor could and should do to increase his options and flexibility, though both will involve eating a bit of humble pie. First, if he is unwilling to abandon the budget surplus target, per se, he should cut it and defer it. To the extent that voters understand it at all, they won’t really lose much sleep if the Chancellor borrows a few billion pounds more in 2015-16 than expected, and pushes the surplus target out a couple of years. He can dress this up any way he likes, and either or both of these are likely.
Second, he could be bolder and braver by getting pensioners to pay, especially as he has bestowed unparalleled largesse upon them since 2010. The basic state pension (BSP) has gone up 16 per cent, or more than 5 per cent in real terms, and is ring-fenced by the Conservative manifesto’s "triple lock" commitment to raise pensions each year by the highest of earnings, CPI or 2.5 per cent. On top of that, pensioners get free TV licenses, bus passes, winter fuel payments, a Christmas bonus and other assistance, for example, the subsidised four per cent yield on the latest National Savings products for the over 65s.
Most of the country’s 13m pensioners, even if they own their own home, depend on many if not all these anti-poverty initiatives. But not all. If we means-test poorer working people for welfare benefits, why shouldn’t we means-test richer retirees for the BSP and other benefits? Think about it. According to the Department for Work and Pensions, 39 per cent of all, and 51 per cent of recent BSP recipients got more than half their income from private sources (2012/13). And according to the ONS, just over half of households in the top 20 per cent of income distribution had private pension wealth over £150,000. About five per cent had no private pension provision, but five per cent of households in the bottom 20 per cent also had private pension wealth over £150,000.
To simplify, if the wealthiest one per cent of pensioners had to forego the standard roughly £6,000 BSP plus other freebies, the government could save close to £1n. Top four per cent, £4bn —and tax credit problem solved. And so on. Public discourse would doubtless reveal an array of policy measures that might apply to the top one per cent, five per cent, 10 per cent and so on, but it is surely wrong and a missed opportunity not to consider an initial foray.
Best not to hold one’s breath though. The government has already announced that it will raise pensions by 2.9 per cent next year as a result of the triple lock, with earnings being the trigger. One day, someone is going to challenge this in court, and then we might have a proper debate about universal benefits in ageing societies, and how to make appropriate and fair savings from the welfare bill.
