My Lords, your Lordships still have me here for a little longer; I am not retiring yet. I refer the House to the Autumn Statement made earlier in another place by my right honourable friend the Chancellor of the Exchequer, copies of which have been made available in the Printed Paper Office and the text of which will be printed in full in the Official Report. I commend my right honourable friend’s Statement to this House.
The following Statement was made earlier in the House of Commons.
“It is taking time, but the British economy is healing. After the biggest financial crash of our lifetimes, people know that we face deep-seated problems at home and abroad. At home, we live with the decade of debt and the failure to equip Britain to compete in the modern world, and we face a multitude of problems from abroad—the US fiscal cliff, the slowing growth in China, and above all the eurozone, now in recession.
People know that there are no quick fixes to these problems but they want to know that we are making progress, and the message from today’s Autumn Statement is that we are making progress. It is a hard road, but we are getting there. Britain is on the right track and turning back now would be a disaster. We have much more to do. The deficit has fallen by a quarter in just two years, and today’s figures show that it is forecast to continue to fall. Exports of goods to the major emerging economies, which were pitifully low, have doubled since 2009. Since this coalition Government came to office, 1.2 million new jobs have been created in the private sector. In a world economy where bond investors are fleeing countries that they regard as risky, investment is flowing into UK gilts, instead of flying from them. We have to keep it that way.
Two years ago, Britain was in the danger zone. Now we are seen as one of the safe havens, able to borrow money at lower interest rates than at any time in our history.
Today’s forecast shows a £33 billion saving on the debt interest payments that it was predicted we would have to pay two years ago. That is as much as the entire defence budget. That is why in this Autumn Statement, we show that this coalition Government are confronting the country’s problems, instead of ducking them.
Today we reaffirm our commitment to reducing the deficit, setting out the details of our spending plans for 2015-16 and rolling forward an outline framework into 2017-18. We show our determination to do this fairly, with further savings from bureaucracy, the benefit bills and the better-off. We go on equipping Britain to succeed in the global race by switching from current spending to capital investment in science, roads and education. We offer new support for business and enterprise, so they can create the jobs we need. In everything we do, we will show today that we are on the side of those who want to work hard and get on.
The Office for Budget Responsibility has today produced its latest economic forecast and it is a measure of the constitutional achievement that it is taken for granted that our country’s forecast is now produced independently of the Treasury, free from the political interference of the past. I want to thank Robert Chote, his fellow members of the Budget Responsibility Committee, Steve Nickell and Graham Parker, and all their staff at the OBR for their rigorous approach.
One of the advantages of the creation of the OBR is that we get not only independent forecasts, but an independent explanation for why the forecasts are as they are. For example, if lower growth was the result of the Government’s fiscal policy, it would say so. But it does not. It says that the economy has “performed less strongly” than expected and forecasts growth this year of minus 0.1%, but in its view,
“the weaker than expected growth can be more than accounted for by over-optimism regarding net trade”.
The OBR had previously assumed that the eurozone would begin to recover in the second half of this year. Instead, of course, it has continued to contract, which has hit our exports to those markets and the net trade numbers. The eurozone crisis has also, it says, spilled over into “tighter credit conditions” and,
“elevated UK bank funding costs”.
In its words, those problems will,
“constrain growth for several years to come”.
There are also domestic problems that the OBR refers to. In the report today the contraction in 2008-09 is now assessed to be deeper than previously thought, with GDP shrinking by a staggering 6.3%, the largest shock to our economy since the Second World War. In the OBR’s view, the aftermath of that shock continues to weigh on the productivity of the UK economy, with credit rationing and impaired financial markets potentially impeding the expansion of successful firms. It says:
“GDP growth is now expected to be lower in every year of the forecast period, as credit conditions take longer to normalise and global growth remains weaker than previously expected”.
As a result, the OBR forecasts that the economy will grow by 1.2% next year, 2% in 2014, 2.3% in 2015, 2.7% in 2016 and 2.8% in 2017.
So the economy is recovering, and it is recovering more quickly than many of our neighbours. The International Monetary Fund estimates that next year the UK will grow more strongly than either France or Germany. Our credible fiscal policy allows for supportive monetary policy and, with the Bank of England, we are directly addressing the problems of tight credit through the £70 billion funding for lending scheme. In the OBR’s view, that has reduced UK bank funding costs, lowered interest rates in the real economy and will add to the level of real GDP.
One area where the British economy has done much better than forecast is in creating jobs. Since early 2010, the private sector has created 1.2 million new jobs—600,000 more than predicted—and youth unemployment has been falling. The OBR now expects unemployment to peak at 8.3%, instead of 8.7%. That is at a time when the unemployment rate in Spain is 26%, in France it is 11% and across the whole eurozone it is almost 12%. Employment, which is already at a record high, is set to go on rising each year of the forecast. For every one job less in the public sector, two new jobs are expected to be created in the private sector. Britain now has a greater proportion of its people in work than either the eurozone or the United States of America. More jobs means that the impact of the weaker than forecast GDP on the public finances has been less than some might have expected.
There have been three developments that have each had a significant one-off impact on the public finances, and the report we are publishing today shows clearly and transparently the impact of all three. First, there is the transfer of the Royal Mail pension fund to the public sector as part of its privatisation. That produces a one-off reduction in the deficit of £28 billion this year, but it will add to the deficit in the years after.
Secondly, the previous Government had classified Bradford & Bingley and Northern Rock Asset Management as off balance sheet. Today, they are brought on balance sheet, in line with the judgment of the Office for National Statistics. That adds around £70 billion to our national debt and reminds us of the price the country is still paying for the failures of the past.
Thirdly, the Government have decided, with the agreement of the Bank of England, to transfer excess cash held in the asset purchase facility to the Exchequer. This is sensible cash management, and it is in line with the approach of the Bank of Japan and the US Federal Reserve. I welcome the OBR’s verdict that this is, in its words, “more transparent” than the previous approach. I want to make sure that its impact on the figures is also completely transparent, so we have today published the forecasts for the public finances with and without the impact of the APF decision.
When we came to office, the deficit stood at 11.2%—the highest in our peacetime history. It was forecast to be the largest of any major economy in the world. In the past two years, the deficit has fallen by a quarter. Today’s figures show that with or without the APF coupons, the deficit is forecast to fall this year as well, and cash borrowing is forecast to fall too. Last year, the deficit was 7.9%. This year, with the APF coupons, it is forecast to be 6.9%, but that excludes the impact of the Royal Mail pension assets. It is falling and it will continue to fall each and every year, to 6.1% next year, 5.2% the year after, 4.2% in 2015-16, then 2.6%, before reaching 1.6% in 2017-18.
In 2009-10, the country was borrowing £159 billion. This year, we are borrowing £108 billion. That is forecast to fall to £99 billion next year, £88 billion the year after, then £73 billion in 2015-16, and £49 billion and £31 billion in the two years after that. These are the central forecasts published by the OBR, with the asset purchase facility cash transfer included. When the transfer is excluded, as we show in the document, the deficit also falls, from 7.9% last year to 7.7% this year, then 6.9% next year, and it falls in every single year after that—and cash borrowing falls in every year as well.
There are those who have been saying that the deficit was going up this year—indeed, I think I heard it in Prime Minister’s questions—but any way you present these figures, this is not what the OBR forecasts show today. It says that the deficit is coming down—coming down this year and every year of this Parliament. Yes, the deficit is still far too high for comfort—we cannot relax our efforts to make our economy safe—but Britain is heading in the right direction. The road is hard but we are making progress.
Unlike the previous Government’s golden rule, the regime we have set up means that the Chancellor is no longer judge and jury of their own fiscal rules, and today the OBR has assessed us against those rules. First, the fiscal mandate: this is the commitment that we will balance the cyclically adjusted current budget over the coming five years. I can tell the House that the OBR has assessed that we are, in its words, “on course” to meet our fiscal mandate. In other words, we have a better than 50% chance of eliminating the structural current deficit in five years’ time—that part of our borrowing that does not recover automatically as the economy grows. This is true, again, with or without the transfer of the coupons, so we will meet our fiscal mandate. But the OBR assesses in its central forecast that we do not meet the supplementary objective that aims to have debt falling by 2015-16. The point at which debt starts to fall has been delayed by one year, to 2016-17, and the OBR’s central forecast is that net debt will be 74.7% this year, then 76.8% next year, 79% in 2014-15, and 79.9% in 2015-16, before falling to 79.2% in 2016-17 and 77.3% in 2017-18.
In short, the tougher economic conditions mean that while our deficit is forecast to go on falling, instead of taking three years to get our debt falling, it is going to take four. Confronted with this news, some say we should abandon our deficit plan and try to borrow more. They think that by borrowing more, we can borrow less. That would risk higher interest rates, more debt interest payments, and a complete loss of Britain’s fiscal credibility. We are not taking that road to ruin.
Then there are those who say that despite all that has happened in the world this year, we should cut even more now to hit the debt target. That would require £17 billion of extra cuts a year. Let me explain why I have decided not to take this course.
We have always argued that we should let the automatic stabilisers work. We have not argued that we should chase down a cyclical or temporary deterioration in the economy, particularly one that our own independent body says is largely driven by problems abroad. That is also the judgment of the International Monetary Fund, the OECD and the Governor of the Bank of England.
Our aim is to reduce the structural deficit—the permanent hole in our public finances that will not be repaired as the economy recovers. And we are—we have cut the structural deficit by 3 percentage points in the past two years, more than any other G7 country, and it is set to go on being cut at a similar rate in the years ahead. This lower deficit is delivered by our public spending plans and we are going to stick with those plans. Overall, we are not going faster or slower with those plans; the measures I will announce in this Autumn Statement are fiscally neutral across this Parliament. There is no net rise in taxes today—any taxes increased are offset by taxes cut.
In last year’s Autumn Statement, we committed the Government to maintain the same pace of consolidation for two further years beyond the end of the current spending review, into 2015 and 2016-17. In this year’s Autumn Statement, we extend the consolidation for one further year, into 2017-18. The OBR projects that, as a result, the share of national income spent by the state will fall from almost 48% of GDP in 2009-10 to 39.5% by 2017-18. The document shows that total managed expenditure will continue to fall, and will now be £4.6 billion lower in 2017-18 than if it had been held flat in real terms. No decision to cut spending is ever easy, but those who object must explain whether instead they would have higher taxes, higher borrowing or both.
I also provide further detail of the consolidation plans for 2015-16, the last year of this Parliament. I said two years ago that the correct balance for our fiscal consolidation between spending and tax should be 80:20. I can confirm that by the end of 2015-16, the decisions we announce today mean that we will almost exactly deliver on that 80:20 mix. Total spending will fall in the final year of this Parliament at the same rate as through the current spending review.
I can confirm today that the overall envelope for total managed expenditure will be set at £745 billion. We start with the working assumption that departmental resource totals will continue on the same trajectory as over the current spending review. The detail of departmental spending plans for 2015-16 will be set at a spending review, which will be announced during the first half of next year. What we are doing today is taking steps now to help deliver those spending plans and to go on reducing the deficit in a way that is fair.
This Government have shown that it is possible to restore sanity to the public finances while improving the quality of our public services—crime has fallen, hospital waiting lists are down, school standards are up—and this is with a Civil Service that is today smaller than at any time since the Second World War.
We are today publishing the reports we commissioned from the pay review bodies on market-facing pay. We commit to implementing these reports. This means continuing with national pay arrangements in the NHS and Prison Service, and we will not make changes to the Civil Service arrangements, either; but the School Teachers Review Body recommends much greater freedom to individual schools to set pay in line with performance, and my right honourable friend the Education Secretary will set out how that will be implemented.
Through the efforts of individual government departments and the support of the Chief Secretary and my right honourable friend the Minister for the Cabinet Office, we have already generated £12 billion of efficiency savings in Whitehall, but we believe there is room to do even more. If all departments reduced their spending on administration in line with the best-performing departments, such as Education and Communities and Local Government, another £1 billion could be saved. If all departments made greater provision of digital services, rationalised their property estates, as some have done, a further £1 billion could be saved. Today, therefore, we are reducing departmental resource budgets by 1% next year and 2% in the year after.
We will continue to seek efficiency savings in the NHS and in our schools, but that money will be recycled to protect spending in these priority areas. Local government budgets are already being held down next year to deliver the freeze in council tax, so we will not seek the additional 1% savings next year, but we will look for the 2% saving the year after. Although the Ministry of Defence is included in these measures, it will be given flexibility on its multi-year budget to ensure that this will not lead to reductions in military manpower or the core defence equipment programme over the Parliament.
A mark of our values as a society is our commitment to the world’s poorest. We made a promise as a country that we would spend 0.7% of our gross national income on international development and I am proud to be part of the first British Government in history who will honour that commitment and honour it as promised next year. We will not, however, spend more than 0.7% so, as we did last year, we will adjust the Department for International Development’s budget to reflect the latest economic forecasts.
In the medium term these savings across Whitehall will help departments maintain the right trajectory for the years that follow the spending review and help us to pay off the deficit in future. In the short term, I am switching these current savings into capital—all the money saved in the first two years will be reinvested as part of a £5 billion capital investment in the infrastructure of our country. Despite the fiscal challenges we face, public investment as a share of GDP will be higher on average in this Parliament than it was under the last Labour Government. It is exactly what a Government equipping Britain to compete in the modern global economy should be doing.
We are committing an extra £1 billion to roads, which includes four major new schemes: to upgrade key sections of the Al, bringing the route from London to Newcastle up to motorway standard; to link the A5 with the Ml; to dual the A30 in Cornwall; and to upgrade the M25, which will support the biggest port developments in Europe. I pay tribute to my honourable friend the Member for Thurrock for campaigning to achieve this.
We have already set out plans this autumn for a huge investment in rail, and my right honourable friend the Transport Secretary will set out in the new year plans to take High Speed 2 to the north-west and west Yorkshire. I can today confirm a £1 billion loan and a guarantee to extend the Northern line to Battersea power station and support a new development on a similar scale to the Olympic park.
We are confirming funding and reforms to assist construction of up to 120,000 new homes and delivering on flood defence schemes in more cities. On top of broadband expansion for our countryside and our larger cities, we are funding ultrafast broadband in 12 smaller cities: Brighton and Hove, Cambridge, Coventry, Derby, Oxford, Portsmouth, Salford, York, Newport, Aberdeen, Perth and Derry/Londonderry. In addition to the third of a billion announced this autumn for British science, we are today announcing £600 million more for the UK’s scientific research infrastructure.
Since improving our education system is the best investment in a competitive economy, I am today committing £270 million to fund improvements in further education colleges and £1 billion to expand good schools and build 100 new free schools and academies. Scotland, Wales and Northern Ireland will get their Barnett share of additional capital spending put at the disposal of their devolved Administrations.
On top of the £5 billion of new capital spending in infrastructure and support for business, we are ready to provide guarantees for up to £40 billion more. Today I can announce that projects worth £10 billion have already pre-qualified. We are offering £10 billion-worth of guarantees for housing, too. Our country’s pension funds will launch their new independent infrastructure investment platform next year as well, and we have today published full details of the replacement for the discredited private finance initiative. Since we can all see now that the public sector was sharing the risk, we will now ensure that we also share in the reward, and I commend my honourable friend the Member for Hereford and South Herefordshire for his work in this area.
Taken together, this is a revolution in the sources of finance for upgrading Britain’s infrastructure and equipping Britain to win in the global race. Annual average infrastructure investment, which was £29 billion under the last Labour Government, is now £33 billion.
Savings from Whitehall are not enough by themselves to tackle our debts. We need to find other savings, and we need to do so in a way that is fair. Those with the most should contribute the most, and they will, but fairness is also about being fair to the person who leaves home every morning to go out to work and sees that their neighbour is still asleep, living a life on benefits. As well as a tax system where the richest pay their fair share, we have to have a welfare system that is fair to the working people who pay for it.
Let me start with tax. The vast majority of people, rich or otherwise, pay their taxes and make their contribution. However, there are still too many who illegally evade their taxes or use aggressive tax avoidance in order not to pay their fair share. This Government have taken more action against those people than any before us. Prosecutions for tax evasion are up 80%. We will collect £7 billion more a year in tax that is due than the last Government. We are increasing by about 2,500 the number of tax inspectors going after evaders and avoiders. Next year, we will introduce the first ever general anti-abuse rule—something that never happened in the 13 years before we came into office.
Next year, for the first time in our history, money will be flowing from bank accounts in Switzerland to Britain, instead of the other way around. Because of the treaty that we have signed, we expect to receive £5 billion over the next six years from the undisclosed Swiss bank accounts of UK residents. That is the largest tax evasion settlement in British history.
We are taking further steps today. Hundreds of millions of pounds of tax loopholes are being closed with immediate effect, and we are investigating the abusive use of partnerships. HMRC will not have its budget cut over the next two years, unlike other departments. Instead, we will spend £77 million more on fighting tax avoidance, and not just for wealthy individuals.
We want to have the most competitive corporate tax system of any major economy in the world, but we expect those corporate taxes to be paid. We are therefore confirming today that we will put more resources into ensuring that multinational companies pay their proper share of taxes. We are leading the international effort to prevent artificial transfers of profits to tax havens. With Germany and now France, we have asked the OECD to take that work forward and we will make it an important priority of our G8 presidency next year. In total, we expect the action that we are announcing today to increase the amount of money collected from tax evasion and avoidance by a further £2 billion a year.
Fair and necessary as that is, it is not enough by itself to close the deficit. We need to ask more from the better-off. Punitive tax rates do nothing to raise money, and simply discourage enterprise and investment into Britain. Other countries on our doorstep are trying that approach and paying the price. We are not making that mistake. HMRC data reveal that in the first year of the 50% tax rate, tax revenues from the rich fell by £7 billion and the number of people declaring incomes of over £1 million fell by a half. A tax raid on the rich that raises almost no money is a tax con. We are going to have a top rate of tax that supports enterprise and we are going to raise more money from the rich. Here is a simple fact: the richest will pay a greater share of income tax revenues in every single year of the coalition Government than in any one of the 13 years of the last Labour Government.
However, to make sure that the deficit reduction remains fair, we need to raise more. We have already raised stamp duty on multi-million pound homes and next week we will publish the legislation to stop the richest avoiding stamp duty. But we will not introduce a new tax on property. That would require the revaluation of hundreds of thousands of homes. In my view, it would be intrusive, it would be expensive to levy, it would raise little and the temptation for future Chancellors to bring ever more homes into its net would be irresistible, so we are not having a new homes tax.
In this Parliament, we have already reduced the amount of tax relief that we give to the very largest pension pots. From 2014-15, I will further reduce the lifetime allowance from £1.5 million to £1.25 million, and reduce the annual allowance from £50,000 to £40,000. That will reduce the cost of tax relief to the public purse by an extra £1 billion a year by 2016-17. Ninety-eight per cent of the people currently approaching retirement have a pension pot worth less than £1.25 million. Indeed, the median pot for such people is just £55,000. Ninety-nine per cent of pension savers make annual contributions to their pensions of less than £40,000. The average contribution to a pension is just £6,000 a year.
I know that these tax measures will not be welcomed by all—ways to reduce the deficit never are—but we must demonstrate that we are all in this together. When looking for savings, I think that it is fair to look at the tax relief that we give to the top 1%.
I want to help the great majority of savers. That is why we are introducing a generous new single-tier pension, so that people know it always pays to save. That is why I will uprate next April the overall individual savings account limit to £11,520. We will also consult on allowing investments in equity markets for small and medium-sized enterprises, such as the alternative investment market, to be held directly in stocks and shares ISAs to encourage investment in growing businesses.
I have also listened to the concerns from pensioners about draw-down limits. I am today announcing that the Government will raise the capped draw-down limit from 100% to 120%, giving pensioners with such arrangements the option of increasing their incomes.
It is also fair to look at the way in which we uprate benefits and some tax thresholds. The basic state pension has this year gone up by the largest cash amount in its history. Next year, thanks to our triple lock, I confirm that it will rise by 2.5%, which is higher than either earnings or inflation. That takes the level of the basic state pension to £110.15 a week.
When it comes to working-age welfare, we have already made substantial reforms. We have cut £18 billion a year from the welfare bill. Benefits are being capped for the first time, so families out of work will not get more than the average family gets for being in work. We have increased efforts to fight welfare fraud. Today, we announce further measures and checks to save more than £1 billion in the next four years by reducing fraud, error and debt in the tax credit system. Next year, my right honourable friend the Secretary of State for Work and Pensions will introduce the new universal credit so that it always pays to work. Today, we are setting the key parameters, such as the levels of earning disregards.
We have to acknowledge that over the last five years, those on out-of-work benefits have seen their incomes rise twice as fast as those in work. With pay restraint in businesses and Government, average earnings have risen by about 10% since 2007. Out-of-work benefits have gone up by about 20%. That is not fair to working people who pay the taxes that fund them. Those working in the public services, who have seen their basic pay frozen, will now see it rise by an average of 1%. A similar approach of a 1% rise should apply to those in receipt of benefits. That is fair and it will ensure that we have a welfare system that Britain can afford. We will support the vulnerable, so carers’ benefits and disability benefits, including disability elements of tax credits, will be increased in line with inflation, and we are extending the support for mortgage interest for two more years.
However, most working-age benefits, including jobseeker’s allowance, employment and support allowance and income support, will be uprated by 1% for the next three years. We will also uprate elements of child tax credit and working tax credit by 1% for the next three years, although previously planned freezes will go ahead. Local housing allowance rates, which are a central component of housing benefit, will be uprated in line with the existing policy next April and we will then cap increases at 1% in the two years after that. For that measure, 30% of the savings will be used to exempt from the new cap those areas with the highest rent increases. The earning disregards for universal credit will also be uprated by 1% for two years from April 2014. Child benefit is currently frozen. It, too, will now rise by 1% for two years from April 2014.
Let me be clear: uprating benefits at 1% means that people get more cash, but less than the rate of inflation. Taken together, we will save £3.7 billion in 2015-16 and deliver permanent savings each and every year from our country’s welfare bill. To bring all those decisions on many benefits over many years together, we will introduce primary legislation in Parliament in the welfare uprating Bill. I hope that it will command support from both sides of the House.
We will apply a similar approach to uprating some of our tax thresholds to that that we are applying to welfare. The higher rate threshold will be increased by 1% in the tax years 2014-15 and 2015-16. So the income at which people start paying the 40% rate will go up from £41,450 to £41,865 and then to £42,285. I want to be completely clear with people: this is an increase; in fact, it is the first cash increase in the higher rate threshold in this Parliament, but it is not an increase in line with inflation, so it will raise £1 billion of revenue by 2015-16. Again, there are no easy ways to reduce the deficit, but from year to year, no one will pay a penny more in income tax.
In the same way, the capital gains tax annual exempt amount will be increased by 1% over the same period, reaching £11,100. The inheritance tax nil-band rate, which has been frozen since 2009 at £325,000, will be increased by 1% in 2015-16 to £329,000. Taken with the welfare uprating decisions, that is a fair approach to paying off Britain’s debts.
However, dealing with those debts is only one part of making Britain fit to compete in the global race. Countries like ours risk being out-smarted, outworked and out-competed by the new emerging economies. We asked Michael Heseltine to report on how to make the Government work better for business and enterprise. I think that it is fair to say that his answer has captured the imagination of all political parties.
We will respond formally in the spring, but here is what we will do now. First, government spending should be aligned with the priorities of the local business community. We will provide new money to support the local enterprise partnerships, and from April 2015, the Government will place more of the funding that currently goes to local transport, housing, skills and getting people back to work into a single pot that LEPs can bid for. Details will be set out in the spending review. Before then, we are putting more money into the regional growth fund, which is helping businesses create half a million new jobs.
Secondly, as Lord Heseltine also recommends, we will support industries and technologies where Britain has a clear advantage. With the support of my right honourable friend the Business Secretary, we will extend our global lead in aerospace and support the supply chains of advanced manufacturing. We are also taking big steps today to support British companies that export to new emerging markets in Asia, Africa and the Americas. I am increasing the funding for UK Trade & Investment by more than 25% a year, so that it can help more firms build the capacity of overseas British chambers and maintain our country’s position as the No. 1 destination in Europe for foreign investment. We are also launching a new £1.5 billion export finance facility to support the purchase of British exports.
Thirdly, we are addressing credit problems for companies. We are creating a new business bank, and today we have confirmed that we are providing it with £1 billion of extra capital, which will lever in private lending to help small and medium-sized firms and bring together existing schemes.
Fourthly, we are going to cut business taxes still further. Let me explain how. The temporary doubling of the small business rate relief scheme helps more than half a million small firms, with 350,000 paying no rates at all. The previous Government were going to end it in September 2011; we have already extended it to next April, and, today, I extend it by a further year, to April 2014. We also confirm today the tax relief for our employee shareholder scheme.
The Energy Bill provides certainty and support for billions of pounds of investment in renewable energy. Today, we publish our gas strategy to ensure that we make the best use of lower-cost gas power, including new sources of gas under the land. We are consulting on new tax incentives for shale gas and announcing the creation of a single office so that regulation is safe but simple. We do not want British families and businesses to be left behind as gas prices tumble on the other side of the Atlantic.
We are going to help our construction industry, too. The previous Government abolished empty property relief, and, as excellent work done by my honourable friends the Members for York Outer and for Wolverhampton South West and others shows, that has blighted development in our towns and cities. The proposal from my colleagues that we create a long grace period before newly completed buildings have to pay empty property rates is sensible, and we will introduce it next October.
The previous Government also planned to increase the small companies tax rate to 22%. We have cut it to 20%. However, I would like to help small and medium-sized firms more, and I thank my honourable friends the Members for Burnley and for Pendle for their thoughts on that matter. Starting on 1 January, and for the next two years, I will increase tenfold the annual investment allowance in plant and machinery. Instead of £25,000-worth of investment being eligible for 100% relief, £250,000-worth of investment will now qualify. That capital allowance will cover the total annual investment undertaken by 99% of all the business in Britain. It is a huge boost to all those who run a business and who aspire to grow, expand and create jobs.
I want Britain to have the most competitive business tax regime of any major economy in the world. I have already cut the main core rate of corporation tax from 28% to 24%, and it is set to fall further to 22%. That has helped British companies and frankly left other countries scrambling to keep up. They will have to try harder, for I am today cutting the main corporation tax rate again by a further 1%. In America, the rate is 40%; in France, it is 33%; in Germany, it is 29%. From April 2014, the corporation tax rate in Britain will stand at 21%. That is the lowest rate of any major western economy. It is an advert for our country that says, “Come here; invest here; create jobs here; Britain is open for business.”
We will not pass the benefit of that reduced rate on to banks, and to ensure that we meet our revenue commitments, the bank levy rate will be increased to 0.130% next year. Making banks contribute more is part of our major reforms to the banking system.
We also have to be on the side of those who want to work hard and get on. I know how difficult many families have found the cost of living. In dealing with the deficit, we have had to save money. However, whenever we have been able to help, we have. We have helped councils freeze council tax for two years running, and we are helping them freeze it again next year. We have put a cap on rail fare rises for the next two years, so commuters are not punished for travelling to work. We are forcing energy companies to move families on to the lowest tariffs for their gas and electricity bills.
We have also helped motorists with the cost of petrol. We have cancelled the last Government’s escalator, and I am moving inflation-only rises to September. Fuel is 10p per litre cheaper than it would have been if we had stuck to Labour’s tax plans, and I want to keep it that way, as I know do my colleagues, like my honourable friend the Member for Harlow. There is a 3p per litre rise planned for this January. Now, some have suggested that we delay it until April. I disagree. I suggest we cancel it altogether. There will be no 3p fuel tax rise this January. That is real help with the cost of living for families as they fill up their cars across the country, and it will help businesses, too. It means that, under this Government, we will have had no increase in petrol taxes for nearly two and a half years. In fact, they have been cut.
We have also helped working people by increasing the amount that they can earn before paying any income tax. When the coalition Government came to office, the personal tax allowance stood at just £6,475; next April, it is set to rise to £9,205. Twenty-four million taxpayers have seen their income tax cut; 2 million of the lowest-paid have been taken out of tax altogether.
Because of the difficult decisions we have taken today, we can go even further. From next April, the personal allowance will rise by a further £235. That means a total increase next year of £1,335—the highest cash increase ever. People will be able to earn £9,440 before paying any income tax at all. This is a direct boost to the incomes of people working hard to provide for their families. It is £47 extra in cash next year. In total, it is a £267 cash increase next year. People working full time on the minimum wage will have seen their income tax bill cut in half, and we are within touching distance of the £10,000 personal allowance. And at this time, I propose to extend the benefits of this further increase to higher rate taxpayers. That decision will stand alongside the decision I have had to take on uprating, meaning that, in real terms, a typical higher rate taxpayer will be better off next year and no worse off in total by the year after.
Today we have helped working people, but I do not want to distract from the tough economic situation we face in the world. The public know there are no miracle cures; just the hard work of dealing with our deficit and ensuring Britain wins the global race. That work is under way. The deficit is down. Borrowing is down. Jobs are being created. It is a hard road, but we are making progress, and in everything we do, we are helping those who want to work hard and get on”.
My Lords, I thank the noble Lord, Lord Sassoon, for formally introducing the Statement. In a way, it is a pity that our new convention does not involve repetition of the Statement for there is no doubt that the Chancellor is to be congratulated on the positive morsels that he managed to identify in a very frugal, even miserly, meal.
Three central facts are revealed in this Autumn Statement and the accompanying OBR report. First, the OBR assesses growth this year to be at minus 0.1%. It had expected plus 0.8%, so it is a reduction of about one percentage point. For next year, 2013, it has downgraded its growth forecast from 2% to 1.2%. I fear that next March the ever overly optimistic OBR will be downgrading its forecast once again. Therefore, the growth outlook is rather bleak.
I wish to refer for a moment to paragraph 1.14 of the Autumn Statement, dealing with the sectoral composition of growth in the UK economy. It argues that, if we leave out the financial sector and the North Sea oil and gas sector, the rest of the economy has done comparatively rather well. That is rather like saying that, if we leave out the bowlers, the batting average of the team tends to go up. This is a disreputable piece of analysis and I hope that we will never see its like again.
The second fact revealed in the Autumn Statement is that, compared with the forecast made just last March, the deficit is up in every year of the forecast. Noble Lords may be rather surprised by that assertion because, if they listened to the Chancellor’s Statement, they will know that he seemed to claim the opposite. How can I claim that the deficit is up? I can quote the OBR, which says that,
“policy decisions by the Government and reclassifications have reduced [public sector net borrowing] this year by £16 billion, more than offsetting forecast changes which overall have pushed borrowing up £4 billion”.
I repeat: policy decisions and reclassifications—in other words, fiddling the figures.
What does this fiddle consist of? The main component in padding the numbers is the asset purchase facility transfer of £11.5 billion from the Bank of England to the Treasury. In principle, this seems okay—after all, we are told that the Japanese and the Americans do it too—but what is striking is that no allowance has been made for the requirement expressed in the letter from the governor agreeing to this transfer that, if and when interest differentials change, the Treasury must pay the money back. Will the noble Lord tell us what contingency has been made by the Treasury for transfers back to the Bank in the next five years and what impact this contingency might have on the deficit?
The third fact that is clear in this Autumn Statement is that the end of austerity has been postponed for another year. The noble Lord, Lord Sassoon, has referred us before to his belief that the deficit programme is a five-year rolling programme. So every year the end of austerity is always five years ahead. Like middle age, it retreats before you. Now it has been extended from 2017 to 2018. Under this rolling programme which always extends, austerity will always be with us and it is clear why. We are travelling in the wrong direction, away from growth and away from debt reduction. Surely now is the time to ask why. Why are the British people being subjected to this unending economic misery that is not only cutting living standards now, but as the OBR points out, will cut living standards in the future as productive potential is undermined by low investment and the corrosive impact of unemployment?
In the realms of economic policy there are two entirely different approaches to cutting public indebtedness. The Government’s approach is based on the belief that eliminating the deficit is necessary to produce growth: austerity is the necessary precursor to recovery. Noble Lords will remember that there was even a new expression coined for this approach, “expansionary fiscal consolidation”—a term that seems to have been dropped from government usage in the past year or so. The idea was that cutting the deficit, aligned with a supportive monetary policy—that is, low interest rates—would restore business and consumer confidence, stimulate spending and set the economy on the road to recovery. For the past two and a half years, the UK economy has been the guinea pig on which this theory has been tested. The result: interest rates in a no-growth economy are predictably roughly zero in real terms, but ever looser monetary policy is producing ever less discernible results. Indeed, there is now no discernible result.
Has business confidence returned? The OBR says:
“Lack of confidence regarding the outlook for global and domestic demand is leading firms to postpone investment decisions”.
Has household confidence returned? The OBR states:
“Our forecast for real household disposable income growth is weaker than in March”
It adds that this,
“is expected to constrain household spending”.
So if households are not spending and businesses have no confidence and are not spending, where is the recovery to come from? Net trade has a negative impact on the economy as markets overseas stagnate and the Government are cutting net spending, so making things yet worse. The experiment has failed and the British people are paying the price of the failure. The plans to spend something on infrastructure are welcome after the savage cuts of the past two years, but notice that government investment was down 20% last year and another 9% cut is forecast for this year. The infrastructure plans are a drop in the ocean. Even their impact on demand is offset by the fact that they are to be funded by cuts elsewhere.
On top of all this, the Funding for Lending scheme is not working and the Work Programme is not working. No wonder that in summing up the whole impact on growth of the policy measures in this Autumn Statement, the OBR says they have,
“a limited impact on our economic forecast”.
All the Chancellor’s rhetoric about growth signifies nothing. The Chancellor indicated in the Statement that he intends to make significant cuts in benefits for those out of work, on top of cuts to welfare expenditure announced earlier this year in the Budget. Unfortunately the data supplied in the Autumn Statement do not include the analysis of the distributional impact of policy measures as do Budget documents. Could the noble Lord tell us what is the net impact of the measures announced today on the lowest decile of income recipients?
The most extraordinary aspect of this Autumn Statement is that the Chancellor has implicitly recognised that his policy has failed but is continuing with it none the less. If the policy was working, if expansionary fiscal consolidation had a shred of credibility left, instead of extending austerity to 2018 he would be doing more of it now—let us get on with it, get it done and put us on the road to recovery—but he has lost the courage of his convictions and not found the courage to admit the failure of his policy. There is another way, another approach to cutting the deficit, and that is by stimulating growth that cuts the deficit, not cutting the deficit and hoping that growth appears.
However, growth depends on confidence in growing demand. It requires a substantial infrastructure programme; investment in education and research; substantial reform of the banking industry to deal with the difficulties identified the other day by the governor; and a British investment bank to lead the way in funding the investment that demand would stimulate.
The dreadful growth figures and the slowness of the recovery comprise the worst economic performance of our economy in attempting to come out of recession for more than 100 years. We cannot go on like this. The Government must recognise that their core policy has failed and have the courage to face that fact.
My Lords, as my right honourable friend the Chancellor of the Exchequer said earlier in another place, the British economy is healing. We are on the right track and turning back now would be a disaster. The deficit has already been cut by a quarter and is forecast to continue falling every year of the Parliament. I find it extraordinary that the noble Lord, Lord Eatwell, questions the OBR’s explanation of this by saying that policy decisions are in some way fiddling the books. It is precisely because of the policy decisions that we took in the Budget and are taking again today that that deficit reduction continues to be on track at the same pace.
Since this Government took office, more than 1 million private sector jobs have been created and exports to emerging markets have doubled. In a tough global economic climate we are making progress. The noble Lord, Lord Eatwell, referred to the growth forecast. The OBR’s growth forecast for the UK next year is that the economy will grow faster than, for example, that of France or Germany.
Let me remind your Lordships of a few examples of how the Government are protecting the economy, supporting growth and ensuring fairness, and of the measures that have been welcomed today. The Government have confirmed an extra £5.5 billion of additional infrastructure investment and support for businesses. That is in addition to the similar £5 billion switch from current to capital expenditure last year. The noble Lord may talk about drops in the ocean but the position now is that public and private infrastructure investment in this country is running at £33 billion a year. Under the previous Government, total average annual infrastructure spending was £29 billion. It is very important that we invest in the future of our infrastructure.
There will be a further 1% cut in the main rate of corporation tax from April 2014 to 21%, bringing it down to its lowest level—far lower than that of our most direct competitors and one of the lowest in the G20—and from this coming April the personal allowance will rise by a further £235 on top of the rise previously announced, making it the highest cash increase ever.
I shall now answer one or two of the other points made by the noble Lord, Lord Eatwell, on quantitative easing. First, the numbers are set out scrupulously transparently to show the effects before and after the transfer of cash on the income side from the APF to the Treasury. The numbers are completely clear. On his question about the contingency, the contingent liability on QE has been set out, and will continue to be set out in the notes to the whole of the Government’s accounts, as it should be. The OBR, in its document, points out, the effect of QE on its central case when it unwinds as being a significant reduction in debt.
Finally, the noble Lord, Lord Eatwell, asks about the distributional effects of all of this. This is an important question, because he asks about transparency and the way we disclose the numbers. The previous Government never set out the distributional effects of their Budgets or Autumn Statements in their pre-Budget reports. We have published today on the Treasury website an 18-page document that goes further than even this Government have gone before in their distributional analysis, with several new tables that I warmly commend to the noble Lord, Lord Eatwell. These confirm, as at every stage in this Government’s deficit reduction plan, that those with the broadest shoulders bear the largest brunt. That is there in the document “Impact on households”.
So, as my right honourable friend the Chancellor of the Exchequer said, the deficit is down, borrowing is down and jobs are being created. It is a hard road, but we are making progress and, in everything we do, we are helping those who want to work hard and get on.
My Lords, this may be my only opportunity to pay tribute to My noble Friend Lord Sassoon before he steps down from the Front Bench, so let me do so. As any Minister, he will have expected fire from across the Chamber, but he has also had fire from over his right shoulder on occasion, and he has dealt with it extremely graciously. For many of us, the test of a Minister is how he and his team deal with Back-Benchers. Based on that test, he has been a superb Minister and we will miss him.
The Statement that the Chancellor presented to us today meets the test of being both tough and fair. It is remarkable that, despite the economic conditions that we face, the deficit is still reducing, which will have surprised many of the pundits but I am sure will have pleased this entire House.
As a Liberal Democrat I am most pleased about the decision by the Government to lift the threshold of the starting rate of tax one more time to £9,440. It was utterly unexpected. When this Government came in, that threshold was £6,475. To its credit, the coalition committed to raising it to £10,000. We are only half way through a Parliament, but it is at this point only £560 below its target. The impact is something like £600 more in the pocket of ordinary working people and more than 2 million people taken out of income tax altogether. In this time of economic stress, that is a phenomenal achievement. The Government should be congratulated.
I was pleased that the welfare cuts were well below those that were anticipated; I can see I am being asked to move to a question very quickly, so I will ask one in this way. Growth, as we all know, is now the holy grail that we attempt to achieve for this economy. Does the Minister agree that it now utterly depends on access to credit for the businesses that make up our economy? Will he commit to making sure, when he talks to his Treasury team, that the restructuring of the banks allows a new competitive environment with new entrants and new players that can deliver the kind of credit we need to the small businesses that are the backbone of our economy?
My Lords, I am very grateful to my noble friend for her generous remarks and for her support since she has been her party’s spokesperson on the economy. The two parties are joined at the hip when it comes to the key economic work and all the other work of the Government. Importantly, she reminds us of a critical part of the Autumn Statement: raising the tax threshold to the benefit of 25 million people. That is very important.
On credit and access to credit, I draw the attention of the House and my noble friend to the comments of the OBR today. Its judgment is that the funding for lending scheme will lower rates for credit but increase availability. I very much share my noble friend’s concern to see a more competitive banking landscape emerge. In that context, it is interesting to note that the funding for lending facility is being taken up and having a disproportionate effect on some of the new challenger banks. I hope that that continues and that they continue to be able to increase their lending responsibly off the back of that scheme.
My Lords, perhaps I may add my personal congratulations to the Minister. He has always brought great skill, tact, humour and optimism to his role on the Front Bench. It is a shame that that optimism has not seen the prize delivered because today’s economic Statement is a lamentable one. Against the two principal, navigating stars that the Chancellor of the Exchequer set—the fiscal mandate and a supplementary objective—he has missed, and missed by a country mile. On the first, he has been required to push austerity even further into the next Parliament and, on the second one, he makes only a modest reduction in debt as a percentage of GDP in the year 2017-18, but it is still 3% higher than in the current year. The policy of austerity-led expansion is clearly not working. An extra 1% of GDP growth during the lifetime of this Parliament would have reduced by five percentage points the proportion of debt to GDP. Growth is the key to reducing the deficit.
There are things in the Chancellor’s Statement that I find very commendable, particularly the extension of the dual carriageway of the A30 in my beloved Cornwall. Whether the right honourable Michael Gove will appreciate the use of the word “dualling” as a verb in the Chancellor’s Statement is questionable and I wonder whether Mr Gove would appreciate the arithmetic error in the Chancellor’s Statement on the increase in the inheritance tax nil band.
The Chancellor makes some very good points about attacking tax havens. So my question relates to suggesting to the Minister that, when we chair the G8, we should seriously consider saying that no G8 bank can operate in an offshore centre with a subsidiary or a branch. If, in the future, the banks of the Channel Islands—Guernsey and Jersey—were domestic banks rather than branches of subsidiaries of the world’s leading banks, most of the attraction of using despicable offshore tax havens would fall away.
My Lords, that seemed to be a speech rather than a question. However, I am grateful for some of what the noble Lord, Lord Myners, had to say and I shall miss sparring with him. I remain an optimist. In less than three years since the previous election, the private sector in this country has created 1.8 million new jobs, which is twice what the OBR projected, and the OBR’s projection today for the period up to 2018 is that 2.4 million further new private sector jobs will be created at a time when it estimates that public sector employment will be reduced by 1.1 million. Times are difficult, but I remain optimistic about the underlying strength and vibrancy of the private sector in this economy.
As to the observations of the noble Lord, Lord Myners, about offshore centres, some of the issues that he raises are certainly on the agenda, but it is inappropriate to talk about offshore centres and others. The key thing is to make sure that the so-called offshore centres are brought up to the standards of the best. Some of them have made huge strides; others need to. I take his points.
My Lords, does my noble friend not think it remarkable that the Official Opposition have no proposals for reducing the deficit by cutting public expenditure, and that there does not appear to be a scintilla of humility for the fact that they were running a deficit of some £70 billion at the height of the boom times? It was their irresponsible conduct over the economy that has got us into this mess. Should the Chancellor not be congratulated on not being more outraged at the response that he has had from the Opposition, in which former spokesmen are reduced to criticising the grammar of the Statement rather than its content? The truth is that they have nothing to offer the country to get us out of the mess that they created.
My Lords, I thank the Minister for his personal courtesies to me since I have been a Member of your Lordships’ House.
I welcome the increased allowances for small businesses and the reductions in corporation tax. Will the further reductions in corporation tax dissuade the Minister’s right honourable friend the Prime Minister from considering devolving corporation tax-setting powers to the Northern Ireland Assembly? Secondly, will he consider once more a reduction of VAT to encourage the retrofitting of buildings so that they can not only be improved from an energy-efficiency point of view but benefit from a tax holiday on VAT for a small period of time, which would have limited dead-weight potential but would stimulate the construction sector? Will he give further consideration to those two points?
My Lords, the question of corporation tax in Northern Ireland continues to be considered. The key thing is that we are making the United Kingdom as a whole a more competitive place and in corporate tax terms the most competitive place to do business among our major competitors. Of course, the position in Northern Ireland will continue to be debated.
As far as the reduction in VAT is concerned, this is a case that is made regularly. We believe that what we have announced today—the two-year increase in the investment allowance—is a better way of targeting the limited resources that we have, in addition to what we have done on the basic rate of corporation tax.
My Lords, I add my congratulations to my noble friend on what he has achieved in his time in the House. I wish him well in whatever he chooses to do next. I agree that it is depressing that he has to leave us on the back of a Statement that shows the growth forecast having to be lowered.
It is worth noting that in the Blue Book the GDP fall in 2008-09 has been revisited and has come down by a massive 6.3%. Given that background, it is hardly surprising that the efforts to rebuild the economy are proving difficult. Nevertheless, in this Statement there are several things that will make a major contribution to improving the economy, and I congratulate my right honourable friend the Chancellor on the things he is doing to encourage investment and infrastructure investment.
Does my noble friend share my concerns and those that were voiced recently by Sir Mervyn King, the current Governor of the Bank of England, that one thing that is going to hold back growth in the economy is if the banks do not acknowledge the real state of their balance sheets and take the hits that they should?
Again, I am grateful to my noble friend for her kind words. It is also important that the House recognises that the damage done by the fall in GDP as a consequence of the structural position and the mess left behind by the previous Government, combined with the financial crisis, continues to be assessed as worse and worse. As my noble friend said, it is now estimated to be a fall in GDP of an extraordinary 6.3%.
I also agree with my noble friend that it is important that the banks are realistic about the state of their balance sheets. Linking back to the debate on the Financial Services Bill that we had earlier this afternoon, it is important that the new Financial Policy Committee—up and running now for a period in shadow form—is beginning to get to grips with these issues. These sorts of things were never debated and put on the table by the authorities in the past, when the punchbowl should have been taken away. So my noble friend is completely right.
My Lords, I also wish the Minister well for the future and add my concern to that expressed already about whether this mini-Budget will trigger the necessary growth. Specifically, with regard to the commitment in the Autumn Statement of £5.5 billion in additional infrastructure investment and the consequential £227 million additional capital funding available to the Welsh Government, will he confirm that that spending can be allocated as desired by the Welsh Government and does not need to follow the pattern of the £5.5 billion that has generated it? Will he also confirm that in the discussions that have taken place between the Treasury and the Welsh Government over recent weeks with regard to the enhanced capital allowance in enterprise zones, that is not assumed to be coming out of that money?
My Lords, I add my own appreciation of the Minister’s work and success. He has always shown patience, attention to detail, wit and great courtesy and I, too, wish him success and fulfilment in whatever he does next.
The national plan has identified £200 billion of infrastructure investment in transport and communications and about another £200 billion for the energy sector. The financing of that is fairly readily available. For the sovereign wealth funds of the world, it is an attractive investment. I was amazed to find that even the Agricultural Bank of China is setting up in London and is dead keen to put up loan finance. Indeed, it is putting up the loan finance for the improvements to the main road between Edinburgh and Glasgow.
There are also pension funds—who wants to buy gilts at present yields when you might get 4%, 5% or 6% on an infrastructure project? The funding is there, but when I asked the Financial Secretary to the Treasury how much was likely to happen over the next three years, he could not give an answer. There are still delays caused by the way that the planning system works and because of environmental requirements. Now is just the time when this country needs to make those infrastructure investments and get a move on with them. Will the Government look at further measures that they can take to delay these bureaucratic constraints on the infrastructure investment getting going?
I could spend the rest of the three minutes and a lot longer on this but I will be brief. Again, I am grateful to my noble friend for his remarks.
On how the infrastructure is funded, there is still a need for a large debt component in many of the projects, and the debt markets continue to be very difficult. My noble friend is completely right about the appetite of the sovereign wealth funds and I will be going to the Gulf again to visit a number of them next week. But the debt component remains difficult.
As to whether the investment is flowing through, total private and public investment in infrastructure is now running at £33 billion per year compared to an average of £29 billion per year under the previous Government—even with all the investment in social infrastructure that went on. While there is more to be done, that is an important number.
There are other areas, yes, where we need to make more progress. I draw my noble friend’s attention to the policy decisions on energy over the last week, which should now enable the energy markets and investors to invest in a broad sweep of nuclear, renewable and gas assets.
My Lords, I add my congratulations to the Minister. Optimistic he may be, but what remarkable chutzpah he and the Chancellor have shown on a day when they have missed all their key targets.
I wonder if he could help me with just a couple of points in the blizzard of information that we have had today. Is there any increasing demand as a result of the measures announced? As the Minister knows, demand is absolutely essential if we are to have growth and it would appear that the OBR has taken into account all the measures but has still downgraded significantly the growth over the next five years.
Secondly, in Annex B.1 of the Treasury document, the suggestion is that the bottom three deciles of the population will bear about three-quarters of the burden of the fiscal consolidation. In 2015-16, 96% of the reduction will be borne by cuts in welfare and public spending; only 4% will come from tax increases. That is rather different from the 80:20 the Chancellor talked about.
Finally, on the question of interesting accounting, the Autumn Statement includes receipt in the current financial year of £3.5 billion from the auction of the 4G spectrum, which is yet to take place. This receipt is apparently used in the current year to reduce the debt, but appears then to be used in the following financial year to finance spending plans. How can that be?
My Lords, first, the test of increase in demand will ultimately be the growth numbers. The OBR has set out its forecast of growth numbers and—I can only repeat—it is forecasting higher growth next year for the UK compared to countries such as France and Germany.
On the question of the distribution, I draw the attention of the noble Lord, Lord Hollick, to the new chart on the overall level of benefit and public spending receipts in the supplementary document, which shows that, contrary to what the noble Lord is saying, the overall result is significantly progressive across the quintiles.
The deficit reduction plan will continue to be on a 80:20 basis; in other words, with 80% of the deficit consolidation coming from spending reductions and only 20% from tax—just as it was before today. That has not changed. As far as the spectrum auction is concerned, the £3.5 billion has been certified by the OBR as its central estimate of the money that will be coming in this tax year.