5 Dec 2012

Autumn statement: George Osborne reveals benefits cut

George Osborne unveils a real-terms cut in working age benefits in his autumn statement in a bid to boost the UK’s struggling economy.

  • Wide ranging cap on benefits, leading to real terms cut
  • 400,000 more to pay higher rate of tax
  • Fuel duty increase scrapped
  • Growth downgraded
  • Like-for-like government borrowing up £100bn over next five years

The chancellor said there would be one per cent cap on increases on certain benefits payments over the next three years. With the latest inflation figure, as of last month, at 2.7 per cent – the increases would mean a real-terms cut in benefits payments.

Britain’s working age benefits claimants will be hit by the cut, with the one per cent cap applying to job-seekers allowance, employment and support allowance and income support.

The chancellor also said that child benefit, which is currently frozen, would increase by one per cent for two years from April 2014. Local housing allowances, which feed into housing support, will follow the existing policy next year, but will be capped at one per cent for the two following years.

The move is designed to boost the UK’s coffers as it continues to struggle economically. The caps are estimated to raise £3.7bn in 2015/16.

“Confronting problems”

Mr Osborne said the cap would not apply to benefits for the disabled and carers, whose benefits would increase in line with inflation.

“Confronting the country’s problems, not ducking them,” was how the chancellor framed the changes in the statement. He added that the benefits caps were the “fair” way of handling welfare.

“Benefits are being capped for the first time so the average family out of work will not get more than the average family in work,” he said.

Economics Editor Faisal Islam blogs on five things to watch out for in the autumn statement.

He opened his statement, to jeers from the opposition bench, by saying: “It is taking time, but the British economy is healing”. He added that “it is a hard road but we are getting there”. He said the budget was committed to fairness, finding savings from “bureaucracy, from the benefits bill and from the better off”.

“Never had it so tough”

However, it the cap could be seen as a departure from the budget of March this year, in which the coalition vowed to take money from the City, “putting it on the kitchen tables of hard-working families”.

Shadow chancellor Ed Balls said those “who can work, should work – no ifs or buts”, but said Mr Osborne was punishing low-paid working families whilst rewarding millionaires.

After quoting Tory MP Nadine Dorries, who called David Cameron and Mr Osborne “Two arrogant posh boys who don’t know the price of milk”, Mr Balls went on: “What sort of government believes that you can only make low-paid working people work harder by cutting their tax credits but you only make millionaires work harder by cutting their taxes.

“I tell you, certainly not a One Nation government. They must really believe that if you cut taxes at the top the wealth will trickle down.”

Delivering his ‘alternative autumn statement’ for Channel 4 News, Jeremy Todd, chief executive of families charity Family Lives, said families have “never had it so tough” as they do today.

“Planned changes to housing benefit, working tax credit and child benefit need to be reconsidered to ensure that families are not punished when they are already struggling,” he said.

£100bn extra borrowing

Hidden in the figures was the fact that like-for-like government borrowing is set to rise by £100bn over the next five years.

Channel 4 News Economics Editor Faisal Islam saiys: “Officially extra borrowing will rise by around £50bn over the next 5 years, but when the effects of quantitative easing and some other items are stripped out, the like-for-like figure is £100bn extra borrowing.”

Mr Osborne told the House of Commons that the growth forecast for 2012 had been downgraded to -0.1 per cent. He blamed the downgrade on”weaker than expected” economic growth, and a more severe downturn in 2008/09 than had previously been reported.

He reported that the Office for Budget Responsibility (OBR), was forecasting that the UK economy would grow by 1.3 per cent in 2013, 2 per cent in 2014, 2.3 per cent in 2015, 2.7 per cent in 2016 and 2.8 per cent in 2018.

Mr Osborne said Britain’s deficit would fall to 1.6 per cent in the 2017/2018 financial year, from 6.9 per cent at the end of this year. When the coalition government came to power in 2010, Mr Osborne said, the deficit was 11.2 per cent.

However, the chancellor also admitted that the OBR had forecast he would miss his target to cut debt as a proportion of gross domestic product by 2015/16, and said that it would take another year. He added that borrowing was forecast by the OBR to fall from £108bn this year to £49bn in 2017.

Ed Balls, the shadow chancellor, said the autumn statement showed “the true scale of this government’s economic failure”.

Tax avoiders

Amongst other measures announced by the chancellor was an increase in the pursuit of tax avoiders. He said the government was closing “hundreds of millions of pounds of tax loopholes,” and would be receiving £5bn over six years from undisclosed Swiss bank accounts of UK residents, in the “largest tax evasion settlement in British history.”

“HMRC will not have its budget cut over the next two years, unlike other departments,” he said. “Instead we will spend £77m more on fighting tax avoidance – and not just for wealthy individuals.”

Small businesses

Other initiatives announced by the chancellor included:

  • £1bn to expand well-performing schools and to build 100 new free schools and academies.
  • £270m to fund improvement in further education colleges.
  • A tenfold increase in the amount businesses can invest, tax-free, in machinery and vehicles.
  • An extra £1bn for road projects, including four main projects.
  • £600m for scientific research infrastructure.
  • Further savings from tighter Whitehall department budgets.
  • A cancellation of the 3p fuel duty rise.

John Walker, national chairman of the Federation of Small Businesses, welcomed the changes to fuel duty and capital allowances for machinery and vehicles.

Speaking about capital allowances, he said: “This will boost investment which is needed to grow the economy and create jobs. This is a step in the right direction and recognition of the important role small firms will play in the recovery.”

On fuel duty, he added: “It will be a sigh of relief for all small firms that the 3p fuel duty rise has been cancelled. More than eight in 10 small firms rely on their vehicle for work.

“However we note small firms will face an increase in fuel duty in September 2013. Over half of small businesses believe that rising fuel prices are one of the main reasons for increased business costs. Government needs to take the politics out of fuel prices once and for all and look at ways of raising revenue that gives road users greater certainty as to what their overheads will be from one budget to the next.”