Osborne’s Autumn Statement – a contractor’s numerical review

Economy and Fiscal Outlook

• Downgraded GDP forecast – down to 0.9% this year (was 1.7%) and down to 0.7% in 2012 (was 2.3%)
• In the last three months of this year, the economy will end up shrinking by 0.1 %, and then grow by just 0.1% in the next two quarters
• Like the set for growth, the figures for borrowing are worse than expected in the Budget in March. Borrowing will climb to £120bn in 2012/13, up from the £100bn envisioned just eight months ago
• The UK now has the worst structural debt ever outside wartime
• The government aims to eliminate the structural deficit within five years and says debt as a proportion of GDP (on track to hit a record 78%) will be falling by 2015
• Borrowing will come in at £100bn in 2013/14, and £79bn in 2014/15 - up from a previous forecast of £46bn
• Spending cuts to carry on, and debt mountain to remain, until 2017.

(Source: OBR)

Jobs and Unemployment

• Upgraded unemployment forecast in the public sector - by 2017, job cuts will come in at 710,000 (was 400,000)
• Continued weakening of the labour market over the coming year, reflecting the weaker outlook for economic growth
• Unemployment is expected to rise from its current 8.3% of the workforce to 8.7% in the final quarter of 2012, before falling back again to 6.2% by 2016
• The labour market has performed broadly in line with the OBR’s March forecast, although it has shown signs of greater weakness recently
• Latest evidence suggests public sector employers are “front-loading” expected job reductions
• Weaker outlook for private sector job creation.

(Source: OBR)

Income and Pay

• Real household disposable income due to be down by 2.3% this year, a post-war record
• Earnings growth not expected to overtake inflation again until 2013 and not by a significant margin until 2014. As a result, consumer spending is forecast to remain broadly flat in real terms next year, before picking up again
• Public sector pay rises to be capped to 1% until 2015
• Pay Review Bodies, an independent group, to consider how public sector pay can be made more responsive to local labour markets (to report by July 2012)
• 50% income tax relief and a one-year capital gains holiday for investors in start-up companies under the Seed Enterprise Investment Scheme
• To pay for the measure, the current thresholds for CGT are being frozen.

(Source: OBR)

Pensions

• An announced increase in the basic state retirement age from 66 to 67, brought forward to 2026, puts an even greater emphasis on the need for personal provision for retirement
• Widely anticipated cuts to pension tax relief did not materialise, so contractors can still benefit from up to 69% tax relief on contributions to their pension
• Given the awful state of public finances, however, the £19bn cost must mean that higher rate relief could be on borrowed time, so contractors should exploit this valuable tax break while they still can.

(Source: Contractor Money)

 Mortgages

• A raft of schemes to help lower income households on to the property ladder were announced, including measures to rejuvenate the right-to-buy scheme, which will allow council tenants to buy their home at up to 50% reduction off the market value
• Funds raised from sales of council homes will be put in to construction projects to build more affordable new homes across the country
• This is unlikely to be a quick fix to the housing ‘deficit’, however, indicating buy-to-let will continue to see growth well in to next year, and beyond, as first-time buyers will continue to struggle to find the necessary deposit to purchase a home
• The loss of stamp duty exemption below £250,000 next March could see a flurry of activity around the year’s first quarter-end.

(Source: Contractor Money)

Savings and Investments

• Contractors with a large lump sum to invest could make use of the new business investment initiative, which will allow them to invest up to £100,000 in a start-up and benefit from 50% income tax relief, regardless of their personal tax position (see Income and Pay, above).
• Looking at broader investment issues, the outlook for the economy and growth that Osborne highlighted in the beginning of his speech paints a bleak picture for short-term investment
• We therefore advise contractors to take a long term approach and diversify their portfolios to minimise risk
• Buy-to-let could offer an alternative to traditional investment routes, as high rental yields are likely to provide better prospects than savings accounts over the next few years.

(Source: Contractor Money)