Talking Politics

Autumn statement analysis: Osborne protects the middle classes

This was supposed to be the midway point for the austerity drive. We're halfway through the parliament, and halfway through George Osborne's first term in No 11. Yet today he stood up at the despatch box and announced "progress" - the kind of progress in which we're not even halfway through this arduous journey. The British people can be forgiven for collectively whining: "are we nearly there yet?"

Such is the nature of British politics that the woeful weaknesses of the coalition's approach do not get full attention in the days that follow. Instead our attention is on the changes that Osborne has been able to implement. With very limited wiggle room, the chancellor unsurprisingly opted to go for a fiscally neutral package. This means the political question becomes about winners and losers: who is having to pay, and for what?

In Britain in 2012, the political debate is centred on the rich and the poor. The Liberal Democrats failed to get their much-coveted mansions tax, and so are left defending the set of measures which have replaced them. The government has added the money it gets from its tax deal with Switzerland to its latest raid on the richest pensioners to claim that the richest are making an £8.5 billion contribution. Alas, there is no comparable figure for the lowest deciles. The coalition is keen for us to understand what it is doing to punish the rich, but not the poor.

The debate on welfare spending is entirely Conservative in motivation. A graph in today's 'green book' highlights the fact that changes in out-of-work benefit rates have increased ahead of average earnings since 2007. As a result of today's changes, which see most out-of-work benefits increasing below inflation at a rate of just one per cent, that gap will begin narrowing. It remains a Conservative aspiration to cut welfare more.

These welfare changes will together produce £3.6 billion of savings. Government spending cuts, totalling one per cent next year for most departments and two per cent for the following year, make up the remaining £2.4 billion. The belt-tightening continues. But the coalition is boasting that it will achieve £16 billion of cuts in total. Where will the remaining £10 billion come from?

The answer is: they don't know yet. All of that remaining cash will be saved in the 2015/16 financial year - that extra 12 months of austerity which the coalition has now, reluctantly, decided to push on with. International organisations like the World Bank urged the British government to prolong austerity for a year rather than dilute the existing plans, one Treasury source says. It's better to complete the homework but hand it in late than it is to do a shoddy job. The markets know which they would prefer.

This decision has all sorts of complications for British politics. First and foremost, it means that the government's austerity agenda now extends well into the next parliament. The coalition will spend the next six months working out how it plans to divide up the pain between departments; the result will be a full spending review for the 2015/16 year unveiled some time before parliament rises for next summer's long recess.

There is more to it than that, though. It presents a challenge for the Labour party: do they accept the spending totals? Would they raise taxes more, or borrow more? As well as being the right thing to do for the deficit reduction agenda, the party politicos will be very pleased it puts Labour under more pressure in the run-up to 2015.

It is the vote-winning measures which present the biggest headache for the opposition, however. The decision to scrap the 3p rise in fuel duty planned for January altogether, rather than just putting it off until April, wins the chancellor brownie points far in excess of its actual cost. Don't forget, though, that further hikes in fuel duty are still scheduled. Under current plans there will be two further increases before the next general election, in September 2013 and September 2014.

The other big cheer during Osborne's statement in the Commons was the announcement of another point taken off corporation tax, which will now be dropping to 23% from next April and down to 21% by 2014. That is a huge boon for Tory MPs, who have been slavering at the mouth at the prospect of such a move for months. The government's ambition is 20%, which would put Britain on a level playing field with the lowest rate in the G20. The only corporate bodies not benefiting from the move are the banks, who are hit by a higher bank levy as a result. Not that the hike is especially impressive. The government is just doing enough to keep the overall contribution from the banks to the Treasury's coffers at £2.5 billion a year; a politically motivated amount, purely driven by oneupmanship against the £2.3 billion the banks paid up under the last government.

The Lib Dems will be relieved their crusade on income tax - taking the lowest earners out of having to pay it altogether - is making progress. Others will benefit too, though. While there's an extra £235 of relief for the poorest, basic rate taxpayers get £223 off their tax bill and higher rate taxpayers get £98 off. Thanks to further tinkering in the thresholds for higher rate taxpayers, 400,000 more people will enter the 'affluent' bracket. But, the Treasury points out, they will be better off nonetheless.

The middle classes are protected, then. Taken together, Osborne's autumn statement measures represent an attack on the fringes of society: the poorest and richest are paying the price.

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