A lot can happen in nine months

The Chancellor’s Autumn Statement produced few surprises and no giveaways.

In March 2013, George Osborne’s job security looked similar to that of a Premier League manager.  Talk was of a triple dip recession, government borrowing was stuck at £120bn and the Office for Budget Responsibility was running out of red ink for its projections.

Nine months later, the Chancellor was able to present his Autumn Statement having avoided the triple dip recession with economic recovery seemingly on a solid footing.  He could even talk of a budget surplus being in sight, albeit not until 2018/19.  There the rosy picture stopped: 18 months before a general election is not the time for giveaways.  Thus the raft of announcements and re-announcements ended up as tax-neutral.  The main points of interest were:

  • The personal allowance will increase to £10,000 in 2014/15 and the higher rate (40%) tax threshold will increase by £415 to £41,865
  • There will be a new transferable tax allowance of £1,000 for married couples and civil partners from April 2015
  • From 6 April 2015 employers will no longer pay Class 1 National Insurance Contributions on earnings paid up to the Upper Earnings Limit to any employee under the age of 21.
  • The final exemption period for private residence relief will be halved to 18 months from April 2014 while from April 2015 capital gains tax will apply to future gains on residential property owned by non-resident individuals.
  • The overall annual Individual Savings Account (ISA) subscription limit for 2014/15 will rise to £11,880, of which £5,940 can be invested in cash.
  • A raft of specific employment anti-avoidance measures were announced, mostly aimed at arrangements designed to disguise employment.
  • New ‘simplified’ IHT rules for trusts will be introduced from April 2015, following further consultation.


Forward Guidance goes backwards

The Bank of England has been revising its forecasts too.

In November the Bank of England published its latest Quarterly Inflation Report (QIR).  This report had been more eagerly awaited than many of its predecessors because of the Bank’s introduction of ‘forward guidance’ on interest rates in early August.

Back then, Mark Carney, the Bank’s newly imported Governor, suggested that base rate was unlikely to be reviewed until the unemployment rate fell to 7% which was projected to be not until at least of the middle of 2016.  The markets were not convinced and the Bank found itself firmly on the back foot, defending its pessimistic view that it would take over two and a half years for unemployment to drop by 0.8%.

Since August, news on the UK economy has been generally upbeat:

  • Third quarter economic growth was 0.8%, more than some forecasters (including the Office for Budget Responsibility) had earlier pencilled in for the whole year.
  • The latest inflation numbers (for October) showed an unexpectedly sharp drop.  The annual increase in the Consumer Prices Index (CPI) fell by 0.5%, bringing it to 2.2%, only marginally above the Bank’s regularly missed 2% target.
  • The unemployment rate has declined to 7.6%.
  • Government borrowing from April to October 2013 was 8.2% lower than for the same period in 2012.

In its November QIR, the Bank effectively conceded that its summer view had been too gloomy.  In its introduction the Bank said “In the United Kingdom, recovery has finally taken hold.  The economy is growing robustly as lifting uncertainty and thawing credit conditions start to unlock pent-up demand.”  It went on to concede that there is now a “two-in-five chance” its 7% unemployment threshold will be reached by the end of 2014.

Hitting 7% does not mean rates will rise, the Bank stresses.  It is merely the trigger for a review and if other factors are benign the 0.5% base rate could continue.  The stimulation that theoretically provides is still relevant: in inflation adjusted terms the UK economy is still 2.5% smaller than it was in the first quarter of 2008.  Nevertheless, the markets continue to be sceptical, witness the Bank’s own graph showing market derived future interest rates.


6th December 2013