Chancellor George Osborne has delivered his first Autumn Statement of the current Conservative government and laid out the first Comprehensive Spending Review since 2010.
Big news from his speech was the move to abandon planned cuts of £4.4bn to tax credits, in what will be seen as a significant U-turn from the chancellor. The proposed cuts had been controversial since being announced in the ‘emergency’ Budget after the election and failed to get through the House of Lords last month.
It wasn’t all good news in the speech however, although much of the content had been previously trailed in the media so relatively few genuine surprises were to be had.
Osborne reaffirmed his commitment to austerity, saying: “To simply argue public spending must always go up, never be cut, is irresponsible.”
A series of deep cuts to Whitehall departments was announced, including operational spending cuts of 37 per cent cut to the Department for Transport, 33 per cent to the Department of Energy and 20 per cent to the Department of Culture.
There were also a few key issues for investors and savers to be aware of, so in this article we take a look at five of Osborne’s announcements and the industry’s reaction to them.
‘Triple-lock’ allows boost for state pensions
Osborne said: “As a result of our commitment to those who’ve worked hard all their lives and contributed to our society, I can confirm that next year the basic state pension will rise by £3.35 to £119.30 a week. That’s the biggest real terms increase to the basic state pension in 15 years. Taking all of our increases together, over the last five years, pensioners will be £1,125 better off a year than they were when we came to office.”
The chancellor maintained the ‘triple lock’ – which is a guarantee to increase the state pension every year by the higher of inflation, average earnings or a minimum of 2.5 per cent – that was introduced by the coalition in 2010.
It was designed to ensure that pensions were not handed meaningless increases in the state pension, such as the 75p a week increase that was given in 2000, while stopping their income from being eroded by inflation. As well as announcing the £119.30 a week basic state pension, Osborne said the full rate for the new, single-tier pension will stand at £155.65.
Richard Priestley, executive director of retirement income at Canada Life, said of the increases: “The move by the chancellor will protect the incomes of pensioners, helping cement the rapid income gains they have enjoyed of late.”
“In the last 20 years, retired households have seen their incomes climb to record highs, up by 77 per cent in real terms. This has far outstripped growth seen by the rest of the population. The state pension alone makes up two-fifths of a typical household’s income, so this latest move is a boost pensioners will certainly enjoy.”
No ‘tinkering’ to the rest of the pensions system
Some welcome news came from what the chancellor didn’t say as he refrained from unveiling any changes to the rest of the pension system. Announcements over recent years have been dominated by surprise plans for how people save for retirement and how they can use their money when they get there, but nothing came out of the blue in today’s speech.
Malcolm McLean, senior consultant at Barnett Waddingham, said: “Today’s statement has delivered very little in the way of pension surprises. In one sense this is a welcome break after the numerous radical changes of the last two years.”
“However we are still no further forward on the looming time bomb of the potential tax relief changes which the chancellor has indicated will be announced in next year’s Budget. This uncertainty is causing a degree of planning blight for many schemes who are looking to update their systems to give full effect to the pension freedoms and other changes that the chancellor has brought in.”
Kate Smith, regulatory strategy manager at Aegon UK, said: “There was an outside chance that the chancellor would have a surprise up his sleeve in the form an announcement on how pension contributions are taxed and the way in which pension saving is incentivised.”
“While 29 per cent of people told us they’d like greater clarity on this issue at the Autumn Statement, we’re pleased no snap decision has been made. We believe these issues require careful consideration and the idea of a ‘Pension ISA’ risks creating two completely incompatible regimes for every pension saver.”
Crowdfunded debt eligible for ISAs
Although it wasn’t mentioned in Osborne’s speech, HM Treasury documents confirm that debt securities offered through crowdfunding platforms will be permitted in the new Innovative Finance ISA. The case for extending the qualifying assets to include peer-to-peer equity investments continue to be examined by the government.
HM Treasury’s response to its consultation on investment-based crowdfunding said: “The government believes there is a strong case for allowing crowdfunded debt securities issued by companies to be held in ISAs. This will provide ISA holders with greater choice over how to invest and will support the crowdfunding sector to continue to grow as a source of alternative finance for businesses.”
Some 31 organisations and one individual responded to the consultation, which was announced at the March Budget and closed on 30 September. It reveals that there was a spilt in respondent’s views over the case for including equity crowdfunding in ISAs, necessitating the need for more work to be done on this area.
Danny Cox, chartered financial planner at Hargreaves Lansdown, which participated in the consultation, said: “Extending qualifying ISA investments to debt crowdfunding but holding back on equity crowdfunding is a sensible move. Debt securities have much better investor protection than equity.”
“In principle, both equity and debt based crowdfunding could be potentially a large market benefiting investors and UK plc. Crowdfunding projects range hugely to the extent that only those which offer genuine investment as either debt or equity should be described as such.”
New rate of stamp duty on buy-to-let purchases
Osborne said: “Our housing plan addresses the fact that more and more homes are being bought as buy-to-lets or second homes. Many of them are cash purchases that aren’t affected by the restrictions I introduced in the Budget on mortgage interest relief and many of them are bought by those who aren’t resident in this country. Frankly, people buying a home to let should not be squeezing out families who can’t afford a home to buy. So I am introducing new rates of stamp duty that will be 3 per cent higher on the purchase of additional properties like buy-to-lets and second homes.”
This measure, which will come into force from April next year, was one of the shocks of a largely surprise-free Autumn Statement. Documents from HM Treasury predict this extra duty will raise the government some £625m in the 2016/17 year and will rise to £880m by 2020-21.
Jo Bateson, tax partner at KPMG, says the move is “a further blow” to individual property investors from the UK and overseas.
“These latest changes come off the back of the phasing out of interest relief on loans to purchase buy-to-let property and a new capital gains tax on non-UK resident investors on second homes in the UK. These measures might dampen demand for the kind of properties that are marketed as buy to let investments,” she said.
John Spiers, chief executive of EQ Investors, is critical of the move and thinks it will prove harmful to the market.
“The 3 per cent extra for new-build buy-to-let properties will deter many people who might have been thinking of investing in that when their pension allowances are slashed next year” he said. “I’m puzzled why they expect to raise so much extra revenue since the evidence of the last stamp duty change has been that it kills the market.”
A £10bn surplus by 2019-20
Osborne said: “Five years ago, when I presented my first spending review, the country was on the brink of bankruptcy and our economy was in crisis. We took the difficult decisions then. And five years later I report on an economy growing faster than its competitors and public finances set to reach a surplus of £10bn. Today we have set out the further decisions necessary to build this country’s future.”
Analysis of Osborne’s spending plan by the Office for Budgetary Responsibility (OBR) confirms that the government is on track to reduce its debt to GDP ratio in each of this parliament before reaching a surplus in the 2019-20 year. The OBR forecasts that debt with be 82.5 per cent of national income at the end of this year, then eventually 71.3 per cent.
Osborne said this is the result of two key factors. Firstly, tax receipts are forecast to be stronger in reflection of better-than-expected economic growth and, secondly, debt interest payments are likely to be lower, given the low rates on refinancing government borrowing.
Vicky Redwood, chief UK economist at Capital Economics, said: “A surprising improvement in the OBR’s public borrowing forecasts saved the chancellor’s bacon in today’s UK autumn statement, allowing him to scrap his controversial tax credit cuts while still adhering to his fiscal rule to achieve a surplus in 2019/20. The OBR appears to have assumed that the disappointing trend in borrowing so far this fiscal year is just temporary, while ‘modelling changes’ seem to have boosted tax receipts by some £6bn or so a year by the end of the forecast.”
“The big picture regarding the economy has not changed though – namely that a big new wave of austerity is still set to hit next year. Accordingly, we still think that the recovery will slow a bit in 2016. However, the economy is relatively well-placed to weather this squeeze. Most importantly, real wages are rising strongly (whereas they were falling during most of the austerity in the last parliament). So we don’t think that the slowdown will be too sharp.”