APM Autumn Statement Briefing

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Posted by APM on 26th Nov 2015

Unexpected forecasts of higher tax revenues and lower interest costs allow the Chancellor to spend more and to slow down the pace of public expenditure cuts, writes Julian Smith, head of external affairs at APM.

Project management stands to benefit from the uplift in capital spending. Larger companies will be taxed under the Apprenticeship Levy. 

The independent Office for Budget Responsibility (OBR) has changed its fiscal forecasts since the Chancellor’s interim Statement in July, giving him much more wiggle room than anyone anticipated. 

This meant, for example, he could avoid the politically contentious anticipated cuts to the police and also reverse his previous changes to tax credits.

The OBR is expecting a budget surplus of £10.1bn in 2019-20 and £14.7bn by 2020-21. Net debt as a percentage of GDP is forecast to fall from 82.5% in 2015-16 to 71.3% in 2020-21. GDP growth has been revised to be around 2.3-2.5% per year. Oil revenues are projected to fall by 94%.

The question is how the OBR ended up with a £27bn swing in the forecasts since earlier this year.

The OBR remodelled National Insurance Contributions and VAT receipts relating to central government. Over the course of the Parliament, these remodelling changes give an extra £29.1bn.

The Chancellor will also gain from gross tax increases of £28.5bn, notably:

  • £11.6bn from the new apprenticeship levy from April 2017. This will be a 0.5 per cent tax on employers with paybills of more than £3 million.
  • £6.2bn from higher council tax to fund social care
  • £3.8bn from stamp duty being raised by 3% on second homes
  • £690m cutting renewable heat incentive
  • BIS research and innovation grants will be replaced with loans.

The Chancellor said his priorities were: 1) health; 2) infrastructure; 3) “attacking social failures” and 4) national security.

He will spend £18.7bn of his £27bn windfall on loosening the squeeze on public spending, reversing the tax credit cut (though commentators say this is really a deferral), increasing capital expenditure and introducing some reliefs for business.

This is frontloaded: the giveaway next year is £6.2bn, more than half of which will be spent reversing the tax credit cut, and it will be similar in 2017-18 before declining to £2.2bn in 2019-20. 

Key overall points:

  • Public spending will be £83.3bn more over this Parliament than was suggested in March.
  • The Government has also previously announced tax cuts costing £24.6bn over the Parliament cutting corporation tax rates, raising the income tax personal allowance, and extending inheritance tax relief for main residences.
  • Real cuts to spending by central Government departmental spending will now be reduced to £10.4bn over 4 years, as opposed to the £18bn predicted in July and the £42bn anticipated in March. As a result, central government job cuts will fall from 200,000 to 80,000. The average annual departmental cut in administration will be 0.8% per year in real terms, which amounts to £1.9bn.
  • Today's announcement represents a 24% real terms reduction in local government grant funding worth £4.1 billion, which includes the £1.5 billion increase to the Better Care Fund. Local authorities will be allowed to keep the proceeds of asset sales (worth, according to the Treasury, £60bn). So we might expect significant local authority disposals of land and buildings. The Chancellor is driving forward fiscal decentralisation: councils will now depend even more on their limited Council Tax base, business rates and asset sales to balance the books.

The Statement comprises a very long list of measures but here are the highlights from APM’s perspective:

Apprenticeship Levy – tax on big employers

  • New apprenticeship levy from April 2017 at 0.5 per cent tax on employers will raise £3bn per year. It appears that a decision on axing or retaining the apprenticeship levy has not yet been confirmed. The consultation goes on.
  • Every employer will receive a £15,000 allowance to offset against the levy –will hit businesses with paybills of more than £3 million.
  • Providing support to secure launch funding to create a new university in Hereford focused on engineering  in 2016 (subject to relevant approvals)

Infrastructure (also see under Devolution)

  • Construction of HS2 beginning this Parliament
  • £300m Transport Development Fund to provide development funding for projects such as Crossrail 2 and proposals emerging from the Northern Transport Strategy, but will be allocated following advice from the new National Infrastructure Commission.
  • £475m of new funding to support construction of large local transport projects such as the Lowestoft Third River Crossing which are too expensive for local government to fund.
  • The Department for Transport will have its operational budget cut by 37% but will spend £46.7bn (50% increase) on capital investment over the next five years, including "the biggest road improvement programme since the 1970s and the largest programme of rail investment since Victorian times.” There are plans to resurface 80% of the strategic road network and introduce 1300 miles of additional lanes.
  • The £106 million Norwich Northern Distributor Road will enter construction by the end of the year.

House building (much of this pre-announced)

  • Land release to build 160,000 homes. Under-used courts will be closed and used to fund £700m investment in new technology. Old Victorian prisons will be sold to spend more than £1bn on nine modern prisons. Will close Holloway Prison. 
  • Housing budget doubled to £2bn a year. Planning laws will change so that commercial land can be released for specifically developing starter homes.
  • First time buyers aged under 40 are to be offered a 20% discount on 200,000 starter homes (£450,000 in London and £250,000 outside of London).
  • £2.3bn to developers who will build ‘starter homes’. £4bn to help build 135,000 "Help to Buy: Shared Ownership" homes for households earning less than £80,000 (or £90,000 in London). £200m for 10,000 new homes that tenants can live in for five years at reduced rents while they save for a deposit. They will then have "first right" to buy the home. £400m to help build 8,000 specialist homes for older people or those with disabilities.
  • London Help to Buy: Londoners with a 5% deposit will be able to get an interest-free loan worth up to 40% of the value of a newly-built home.

Devolution – local control of infrastructure

  • £13bn overall investment in transport in the 'Northern Powerhouse', while London will receive £11bn support for transport investment, which will be spent on developments including new buses, a network of 'cycle superhighways', additional tube trains and Crossrail.
  • Confirmation of tax-raising powers for local authorities, including elected mayors allocating rates to specific infrastructure projects backed by the business community. Councils will be able to use proceeds of sales of assets for locality. 
  • 4 new Enterprise Zones will be created in Cambridgeshire, Hertfordshire, Luton and across Great Anglia (Norfolk and Suffolk) while the existing Great Yarmouth &  Lowestoft Enterprise Zone will be extended.
  • Northern Ireland corporation tax set at 12.5 per cent. Funding for capital investment in new infrastructure in Northern Ireland will rise by over £600m over 5 years.

Energy

  • Renewable Heat Incentive will be reformed to save £700m.
  • Doubling spending on energy research with a major commitment to small modular nuclear reactors. Support for low-carbon electricity and renewables will more than double.
  • Supporting the creation of the shale gas industry by ensuring that communities benefit from a Shale Wealth Fund, which could be worth up to £1bn.
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