Spending Review: Is Osborne’s tax credit U-turn an astute move?

Today the Chancellor of the Exchequer, George Osborne, delivered the first Autumn Statement and Spending Review of a Conservative majority Government since the mid-1990s, in which he announced that the Government would rebuild Britain and deliver on its commitment to ensure economic and national security.

As expected, the Chancellor restated his pledge to running a budget surplus by 2019-20 and outlined a series of sharp cuts across Government departments in his Spending Review. The Statement, however, was notable for his retreats on some of his more politically-sensitive proposals, including a big U-turn on his planned cuts to tax credits, which will now not go ahead at all. Osborne also announced the protection of funding for the police and to the Foreign Office (both of which had been expected to receive cuts) and used these pledges to emphasise the Government’s focus on national security.

These announcements were made possible by positive news from the Office of Budget Responsibility (OBR), which reported a £27 billion projected improvement in public finances over the next five years, resulting from significant increases in tax revenues and falls in the level of interest payable on public debt. The Chancellor also announced some new significant revenue raising measures, including a new substantial rate for the apprenticeship levy and the increased 3% additional rate on stamp duty for buy-to-let and second home buyers. Osborne also used this Statement to reiterate his “we are the builders” speech made at Conservative Party Conference last month and provide new pledges on infrastructure investment. This included the provision of £12 billion additional spending on capital investments and a commitment to provide 400,000 affordable new homes by the end of the decade.

Despite these high profile spending pledges, however, the Spending Review was still dominated by large-scale cuts, including a commitment to deliver £12 billion of welfare savings and significant reductions to the operating budgets across Whitehall, with Transport, Environment, Energy and Climate Change and Business Departments most heavily targeted. These measures are likely to have significant consequences – but, as with many of these announcements, the full extent and impact of these cuts may not be known for some time after the Chancellor’s speech.

Now in his sixth year as Chancellor, Osborne has developed a reputation for being master at using headline-grabbing announcements at Budgets and Autumn Statements to drive the political and media agenda. His decision to use the improved fiscal position to provide a public U-turn on tax credits may be seen by some as a sign of weakness, but can also be seen as an astute way of defusing a damaging political row and diverting attention away from other controversial areas of policy. Indeed, any such attempt from the Official Opposition to focus media attention on these controversial areas of policy did not appear successful, with Labour’s John McDonnell’s decision to quote Chairman Mao in his response at the Dispatch Box provoking dismay and mockery from both sides of the House. Osborne, meanwhile, will be hoping that this Statement will strike the right balance between demonstrating economic competence and being on the side of working families – positioning him and his Party firmly in the mainstream of British politics.

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