The Chancellor's autumn statement 2012

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The Chancellor's autumn statement 2012

"We reaffirm our commitment to reducing the deficit"

Economic Analysis

05 December 2012

He was clear back in March and he made it clear again today. Despite breaking one of his fiscal rules, George Osborne nonetheless dispelled any rising doubts about his commitment to deficit and debt reduction. Like March’s Budget, the Autumn Statement remained “fiscally neutral” and, according to the independent Office for Budget Responsibility (OBR), will be economically neutral too. But to balance the books the Chancellor has to rely on Swiss cooperation on tax issues, a 4G spectrum auction and an extra year of fiscal austerity.

A weaker economic outlook than in March

The OBR provided the Government with 192 pages of independent economic and fiscal forecasts. It now expects GDP to contract by 0.1% in 2012, compared with expected growth of 0.8% back in March. Growth in 2013 has also been revised down, from 2% to 1.2%, with 2014 now expected to see growth of 2%. It is only from 2015 onwards, when output is expected to rise by 2.4% or more, that the OBR sees the UK economy growing at, or above, its potential rate of growth (2.3% according to the OBR).

The source of the UK’s challenging outlook (and the downward revisions to the near term forecasts) is external. The OBR highlights developments in the Eurozone and elsewhere in the world that make the outlook worse than previously thought. Net exports are now expected to contribute -0.6 percentage points to the overall GDP contraction and an extra and equal drag from companies adjusting their inventories. So it is up to growth in consumption, investment and government spending to keep the contraction in 2012 from being worse than 0.1%.

Supplementary target missed by a year, fiscal mandate rolls on

The OBR now expects net debt as a share of GDP to peak in 2015/16, one year later than what was expected in March. This means that the Chancellor will miss his supplementary fiscal target by one year. However, the OBR still believes that there is a greater than 50% chance that the Chancellor will meet his fiscal mandate of balancing the budget (adjusted for swings in the economy) in the next five years. However, the margin for error has narrowed since March. The deficit is expected to be closed a full two years later than was expected back in June 2010, with net debt as a share of GDP peaking at 79.9%, a full 10 percentage points higher than expected at the time of the Coalition’s first budget.

Less admin, more infrastructure

The Chancellor announced £5bn in new infrastructure spending, with £1.5bn going towards building roads and £1bn towards building schools. To pay for this, government departments will see their resource budgets shrink by a further 1% next year and 2% the year after, although there are exceptions. But to balance the books, the Chancellor also relied on a one-off windfall from the 4G spectrum auction, a new treaty on tax avoidance with Switzerland (that is yet to be ratified) and £4.5 billion in further consolidation that has been “assumed” for 2017/18. This also helps to pay for a further 1% cut to the rate of corporation tax, bringing it down to 21% from April 2014 onwards (accompanied by a rise in the bank levy to 0.13%).

Osborne also cancelled the 3p/litre fuel duty rise set to occur in January, and pushed back a further rise to September of next year. Other new policies included an additional £350million to the regional growth fund, more money to promote UK exports and an increase in the Annual Investment Allowance from £25k to 250k. Households also benefitted from some of Chancellor Osborne’s Christmas cheer and will receive a further £235 rise in the income tax threshold, taking it to £9,440 from April next year. Overall, the OBR expects the economic impact of the new policy measures to provide a small boost to growth of 0.1% in 2013 and 2014.



This material is published by The Royal Bank of Scotland plc (“RBS”).  It is confidential and is provided for your information as an RBS Group employee for use only in connection with the Group’s business.  It is not intended for your own personal use and must not be distributed or its contents disclosed, to any third parties except internally, within the Group, to other employees who have a relevant and genuine Group business need to see this information.  Please note that, whilst this information is believed to be reliable, it has not been independently verified by RBS.  Unless otherwise stated, any views, opinions, forecasts, valuations, prices or estimates contained in this material are those solely of the RBS Group’s Group Economics Department, as at the date of publication of this material and are subject to change.


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