George Osborne exploits fall in borrowing costs to boost growth
Chancellor to move to reassure markets be declaring he is still on course to eliminate structural budget deficit
George Osborne will on Tuesday move to reassure the markets that he remains in control of the British economy when he declares that he is still on course to eliminate the structural budget deficit after a projected 21.5bn fall in Britain's borrowing costs.
Amid warnings from the Organisation for Economic Co-operation and Development (OECD) that Britain faces a slide into a double-dip recession this winter, the chancellor will say in his long-awaited autumn statement that he expects to meet his "fiscal mandate" after a fall in 10-year gilt rates. He will hail the lower borrowing costs as a sign of how he has protected Britain from the global sovereign debt storm that is currently focused on the eurozone.
Osborne will say that his emergency budget of June 2010, in which he pledged to eliminate the structural deficit by 2015-16, has reassured the markets and led to a fall in gilt rates. He will say that 10-year gilt rates have fallen by 1.3 percentage points, from 3.6% to 2.3%, since the last forecast by the Office for Budget Responsibility at the time of the budget in March. This means that Britain will borrow 21.5bn less than previously forecast between 2011-12 and the end of the current spending period in 2015-16.
The chancellor will deliver his most difficult financial statement to parliament since he outlined his "fiscal mandate" the elimination of the structural deficit by 2015-16 in his emergency budget in June 2010 just over a month after the general election.
Osborne is braced for yet another downgrading of its growth forecast by the Office for Budget Responsibility, the independent forecasters established by the Treasury after the election. The OBR is also expected to say that some of Britain's slow economic growth over the last year is struct! ural, in dicating that Britain has suffered a more permanent dent to the economy than previously forecast.
He will unveil a series of measures designed to promote growth and show that the coalition has not lost sight of its ambitions to promote social mobility.
Osborne will announce:
A 300m plus package of tax breaks to stimulate investment in small businesses.
An additional 380m a year by end of spending review period 2014-15 to extend free childcare for disadvantaged two-year-olds. This will mean that 260,000 disadvantaged two-year-olds will have access to 15 hours of free education and care a week. This will add 650m to the 1bn already earmarked over the spending period.
An extra 50m to help save the overnight sleeper service between Scotland and London after it was threatened with deep and unpopular cuts.
A new seed enterprise investment scheme for business startups. Business angels will be offered the carrot of 50% income tax relief on investments of up to 100,000 in new enterprises, with each company eligible for 150,000 of investment in total.
The chancellor will tell MPs that the UK's recovery has been slowed by the sovereign debt crisis in the eurozone. This point was illustrated by Sir Mervyn King, the Bank of England governor, who told the Commons Treasury select committee: "None of us can really know the scale of shocks that could come from the euro area and no banking system can withstand shocks that are sufficiently large so there is certainly no room for complacency.
"Over the last quarter I think all banks have become less safe because our banking system is exposed to the euro area. There is no question about it."
"There are many things that could happen if developments in the euro area get worse and I honestly don't think it makes sense to pretend that we know precisely how this will play out.
"What we have to do is to be ready and prepared with contingency plans and to make sure that as far as possible that our banking system is as ! robust a s possible to withstand whatever shocks that could come from the euro area."
Under Osborne's tax breaks plan, small companies will see the one-year holiday on business rates due to expire in October 2012 extended for a further six months at an estimated cost to the Treasury of 210m. Osborne believes 500,000 companies will benefit from the tax break, with 330,000 not paying any business rates in 2012-13.
The holiday offers 100% relief on business rates up to 6,000, with progressively smaller rebates on amounts up to a cap of 12,000.
The chancellor is also expected to unveil a new seed enterprise investment scheme for business startups. Business angels will be offered the carrot of 50% income tax relief on investments of up to 100,000 in new enterprises, with each company eligible for 150,000 of investment in total.
The scheme will start in April next year and for its first year will be accompanied by a capital gains tax holiday to encourage those sitting on profits from previous investment to plough their money back into startup companies.
Government sources said the two schemes were likely to cost the exchequer 50m and were intended to help raise capital for those companies seen as potentially risky in the current environment.
Help for slightly larger businesses operating in those regions of the UK particularly hard hit by government spending cuts will also be earmarked for assistance through a business angel co-investment fund.
Small and medium sized companies with turnovers of between 200,000 and 2m a year and seen as having high growth potential will be eligible for help using 50m from the regional growth fund.
Osborne is expected to assist the cashflow of construction companies working on government projects by the setting up of new bank account arrangements to pay companies within five days or less of the due date. At present some companies have to wait up to 100 days for payment.
The 20bn that the chancellor is announcing for "credit easing" i! s money that will be channelled from existing promises that had been made by the Treasury to the Bank of England to enable Threadneedle Street to buy corporate bonds.
The Bank has not purchased many corporate bonds and some of the 50bn of guarantees will now be used, instead, to help banks raise money more cheaply on the markets and in turn reduce the price of loans to small businesses.
The banks are waiting to learn the size of any fee they will be charged to benefit from the government's top-notch, triple A rated guarantee that, theoretically, should reduce the price they pay to borrow money on the markets either directly from other banks or buy issuing bonds.
Will Hutton, co-author of a report on how to revive small business lending, said: "As it is structured, this won't add 1 extra of new credit."
His report, along with Ken Peasnell, argues that the government would have been more effective if it had created a vehicle to buy up small business loans from banks, freeing up their balance sheets.
Under the government's scheme, the cost of loans to small businesses should fall by one percentage point, according to the Treasury's projections, although this may be less if the government does decide to levy a fee for the guarantee.
Banks paid for the benefit of the government's triple A rating in October 2008 when Labour introduced the credit guarantee scheme to help them borrow money from lenders that were otherwise reluctant to lend.
According to analysis by Credit Suisse, as of 27 October there was 34bn of such loans outstanding.
An earlier scheme to help banks raise funds was known as the special liquidity scheme and is due to expire at the end of January 2012.
Analysts at Credit Suisse believe that these existing schemes still have a purpose. "We think that the current liquidity schemes will be extended in the UK to help ease the first quarter funding burden," they said.
Osborne will promise a one-off payment of 50m as a downpayment towards buying n! ew sleep er carriages or to significantly upgrade the existing carriages for services between Scotland and London.
But he will challenge the Scottish government to provide similar levels of funding and a guarantee that commissioning the new carriages will be underway before the end of this financial year before releasing the money, as a condition of the grant.
The Treasury offer follows the announcement on 15 November by Transport Scotland, the devolved government agency responsible for Scottish rail services, that it is considering significant cuts in sleeper services in a review of all train services.
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