Autumn Statement - a view from RBS Economics


Autumn Statement - a view from RBS Economics

RBS Economics looks at the key announcements in today's Autumn Statement

Economic Analysis

03 December 2014

The story continues

An overhaul of stamp duty grabbed the headlines but fundamentally the Chancellor’s Autumn Statement was about the next chapters in two long-running sagas. First, completion of the deficit reduction journey. Second, ensuring the UK can sit amongst the best-performing developed economies. Achieving both rests to a large extent on improving productivity. There, the Chancellor looked to provide a helping hand with support to small firms and investments in roads, skills and elsewhere.

The key judgement call – wages will rise faster than prices

The Office for Budget Responsibility revised up its UK economic growth forecast again for 2014 to 3.0% from 2.7% at the time of the March Budget. Growth in 2015 remains broadly unchanged at 2.4%. But the medium-term prospects have seen a slight downgrade. Growth is expected to be 2.2% in 2016 compared with 2.6% in March and 2017 has been nudged down to 2.4% from 2.6%. Slower global growth is partly to blame. There is no forecast rebalancing toward exports.

Despite the downgrade it’s still a solid growth outlook. The OBR emphasises it rests on one key outcome: a pick-up in wage growth. Real incomes are forecast to grow strongly from next year, owing to lower inflation and higher nominal wage growth. Despite the fatter wallets households are expected to continue to take on debt. The household debt to income ratio is forecast to pass the pre-crisis peak in early 2018. In March it was forecast still to be below the peak even by 2019. 

Interest-ing

It’s a familiar message on the government’s budget deficit – eliminating it is difficult and time-consuming. It is forecast to fall by just £6.3 bn this year to £91.3 bn. That’s half the decline that was expected in March. Lower tax receipts are to blame. These have been revised down by £7.8bn in the current financial year and fully £25.3bn by 2018/19.

There are two offsets to the lower receipts to ensure that the public finances move into annual surplus by 2018/19 (as it was in March). Firstly, the departmental squeeze on spending has been tightened further from 2016/17. Second, lower government bond yields mean lower debt interest payments.

Stamp of approval

The headline grabbing announcement is a reform to stamp duty. The tax on house purchase will move from a ‘slab’ style system to a ‘tiered’ one. At the moment a house that costs £250,000 would incur a stamp duty charge of £2,500. But a house of £250,001 would incur a charge of £7,500. The reform aims to move away from this step-change system. Going forward no stamp duty will be paid on the first £125k; 2% up to £250k; 5% up to £925k; 10% up to £1.5mln and 12% above £1.5mln. Each tax rate will apply only to the particular slice of the selling price to which it applies, not the whole value of the property as per the current system. It’s estimated to benefit 98% of people who pay it.

“We must increase our productivity”

Higher wages, and thus continued solid growth, rests on an improvement in productivity. Closely related is the decline in the budget deficit. So it is no surprise therefore that the Chancellor chose to target this area. Small business, education and infrastructure are all to receive support. The doubling of Small Business Rate Relief will continue for another year and the cap on the annual increase in business rates will be kept at 2% from April 2015 to March 2016. However, the business rate system is to undergo a review. The Funding for Lending scheme has been extended for another year and it will now run to January 2016 but is now only for lending to SMEs. In terms of education, post-graduate students will be able to borrow up to £10k to fund their studies. £15bn of road infrastructure improvements for England had already been announced.

Follow diversion

A ‘diverted profit tax’ of 25% was announced for multinationals on income generated in the UK but “artificially shifted’ abroad. Meanwhile, UK banks will see the amount of profit that can be offset by losses carried forward from the financial crisis limited to 50%. Taken together these measures are expected to generate £5bn over the next five years. Plans to grant Northern Ireland powers to set its own corporation tax were confirmed.

As for households, lower prices at the pump will continue as there will be no rise in fuel duty next year. ISAs will join pensions in being able to be passed on to spouses tax free in the event of death of a spouse. And the tax free allowance will rise to £10,600 in April (£10,500 previously).

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