Britain | The autumn statement

‘Tis not the season

George Osborne makes up for a lack of giveaways with bold tax reform

FIVE months before an election, the chancellor of the exchequer might be expected to play Father Christmas, doling out gifts in an attempt to win favour with the electorate. When George Osborne delivered Britain’s annual mini-budget, the autumn statement, on December 3rd there was no such largesse. New spending commitments were minimal because Britain’s deficit—which totals 5% of GDP—remains a bind. But the Conservative chancellor still managed to produce a few surprises, including a significant reform to the taxation of property purchases.

As expected, Mr Osborne announced yet another missed deficit-reduction target. Despite strong growth—likely to be 3% this year—the Office for Budget Responsibility (OBR), Britain’s fiscal watchdog, says borrowing will be £91 billion ($143 billion) in 2014-15, £5 billion higher than forecast in March. Luckily for Mr Osborne, this still represents a slight fall on last year, sparing him the embarrassment of the deficit widening on his watch, even if underlying borrowing, which strips out short-term economic fluctuations, will rise.

The primary cause of the increase in borrowing is a similarly-sized undershooting of income-tax receipts, which have disappointed recently (see chart 1). A result of a low-wage recovery combined with tax cuts for low earners, this shortfall looks worryingly durable. Yet the chancellor argues that lower government spending should put him back on track by 2016-17.

Mr Osborne’s main boast is that he has a firm grip on spending. That is in fact partly the result of low interest rates, which are reducing the cost of servicing Britain’s hefty government debt. Yet strong job creation, for which Mr Osborne can take some credit, is bringing down the welfare bill. Assuming that growth continues and the stringent further cuts Mr Osborne is plotting come to pass, the OBR predicts that, by 2018-19, spending will be £26 billion less than it had expected.

But those assumptions may be wrong. Departmental budgets have been agreed only until 2015-16, and the next government might not stick to Mr Osborne’s plans. Even if the Tories win again, it will require deeper cuts than voters are prepared for. Mr Osborne replies that no one expected this government’s cuts to pass as easily as they have.

According to the OBR’s forecast, government spending will fall from 41% of GDP today to 35% of GDP by 2019-20. Given that the health, schools, and international aid budgets are ring-fenced, that would suggest a looming massacre of the unprotected budgets for welfare, local government and defence. The forecast requires day-to-day departmental spending—which does not include welfare—to fall from £147 billion today to £86 billion in 2019-20.

So Mr Osborne, the architect of this bloodletting, had no room for pricey giveaways. Instead, he actually tightened the purse-strings in his mini-budget, which involved additional small cuts to the armed forces, justice department, and the fire-service, disguised as a change to pensions. His big surprise was a reform to stamp duty, a tax on property purchases.

Previously, stamp duty operated under a “slab” system. More expensive properties attracted a higher rate, but on the property’s entire value. The resulting thresholds meant paying just a pound more for a house could attract a tax bill several thousands pounds greater. Inevitably, prices clustered just below such points.

These inefficiencies will now be rectified: higher rates will bite only incrementally (see chart 2). Taxes will be lowered for 98% of homebuyers. House prices might rise slightly, but the effect will be small, reckons Lucian Cook of Savills, a real-estate company.

For some of the remaining 2%, tax increases will be eye-watering. Anyone buying a £5m house will have rushed to exchange in the hours following the statement; the tax bill on such a transaction will now soar by 47%—from £350,000 to £514,000.

This was good politics. The opposition Labour Party wants an annual levy on homes worth over £2m. But given the hefty tax bill that will now come with acquiring such a house, this plan looks excessive.

The Treasury reckons the reform to stamp duty will cost about £800m annually. The biggest countervailing contribution to the coffers comes from bank taxes. Like all businesses, banks can use past losses to offset profits, reducing their corporation-tax bills. Many people see this as unjust, since bank losses during the financial crisis were often borne by taxpayers. Now, such relief will be limited to half of a bank’s profits in any one year. In the long-run, this won’t change much; banks will still be able to offset all their losses eventually. But they must do so more slowly, increasing the Treasury’s receipts in the short-term.

There were some small giveaways, including tax cuts for children’s flights, inherited savings accounts, orchestras, and children’s television. A new tax on profits earned in Britain but sent overseas, aimed at corporate-tax avoidance, should also play well with the public. Some see these changes as boondoggles. Professor Philip Booth of the Institute of Economic Affairs, a free-market think-tank, bemoans the added complexity introduced to the tax system and calls for the autumn statement to be abolished so that future chancellors desist from such tinkering.

That is unlikely to happen. The mini-budget has allowed Mr Osborne to outmanoeuvre his opponents. His stamp-duty reforms have been welcomed and few will oppose his banker-bashing. If the real test of the statement—the additional pledge to slash public spending—is yet to come, that will not bother Mr Osborne this side of the election. His reputation for toughness has given him and his party credibility with voters. The mini-budget was designed to remind them of that.

This article appeared in the Britain section of the print edition under the headline "‘Tis not the season"

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