Autumn Statement 2012 is 'borderline crazy'

George Osborne's Autumn Statement rated: Expert opinions on the chancellor's latest attempt to balance Britain's books and offer relief for struggling Britons.

So now we know. Chancellor George Osborne has unveiled his 2012 Autumn Statement, setting out the coalition's financial plans until 2017/18. But was it any good? We take a look at the reaction to key announcements from those in the know – both effusive and apoplectic.

'Borderline crazy' for investors

Flora Maudsley-Barton, director of Parsonage Financial Planning, a Cheshire-based firm of financial advisers, describes the chancellor's consultation on allowing investors to include AIM stocks inside tax-free ISAs as 'borderline crazy'. If passed, this would let investors buy risky shares in small companies traded on London's Alternative Investment Market inside Individual Savings Accounts.

Maudsley-Barton strongly opposes this proposal: “To enable people to invest in AIM stocks via ISAs is borderline crazy. The vast majority of investors do not understand ‘illiquid’, but they will do so very quickly if they go down this route. Everyday investors should be going nowhere near a niche sector designed for typically higher-net-worth individuals with highly diversified portfolios.”

Philippa Gee of Philippa Gee Wealth Management agrees: “I feel that the Autumn Statement is full of red herrings, which would make people think it is a powerful and positive event. One example is the ability for investors to hold AIM shares within an ISA. This is frankly ludicrous, as they would be relevant for only a small proportion of investors, given the much higher levels of risk involved.”

Lower income tax for almost all workers

From 6 April 2013, the personal allowance for income tax will rise by £235 to £9,440. This frees more workers from the tax net and gives all but the highest paid workers a £47-a-year tax cut. Even so, the Low Incomes Tax Reform Group (LITRG) argues that the chancellor's proposals amount to swings and roundabouts.

Indeed, the LITRG calculates that, for some workers getting by on low pay and state handouts, 85% of the latest tax cuts will be wiped out by reduced entitlement to means-tested benefits such as Housing Benefit and Council Tax Benefit.

LITRG's technical director Robin Williamson commented: “The increase in personal allowance is welcome, because fewer people on very low incomes will have to worry about taxation. But people on means-tested benefits whose benefit entitlement is based on after-tax income may not be very much better off overall. If their after-tax income goes up because they are paying less tax, their benefits may fall.”

Motorists 'avoid a New Year headache'

News that the chancellor has scrapped a 3p-a-litre rise in fuel duty scheduled for January was greeted with delight by The AA.

Edmund King, president of Britain's leading motoring organisation, celebrated this U-turn: “Big Ben’s chimes ringing in a nearly £2-a-tank hike in petrol and diesel prices would have backfired on the Government and economy.”

Before the Autumn Statement, The AA warned Osborne that high fuel prices have caused almost three-quarters (73%) of British motorists to cut back on fuel spending and miles driven. The AA also delights in pointing out that luxury Champagne is taxed at a lower duty rate than essential fuels such as petrol and diesel. This explains why the Treasury collected over £27 billion in fuel duty in 2010/11.

Pensioners win, but welfare claimants and working families lose

The chancellor pleased many of Britain's 11.7 million pensioners by announcing that the basic state pension will rise by 2.5% next year. Thanks to a 'triple lock', the basic state pension must rise by the highest of the Consumer Prices Index of inflation, the average rise in earnings and 2.5% a year. The last is the highest of the three, so 2.5% it is.

Conversely, the chancellor was less generous with those Britons who are out of work, disabled or otherwise unable to work. He is to cap the increase in working-age benefits (such as Jobseeker's Allowance) to 1% a year for three years from 2014/15. Given that inflation – the rising cost of living – is likely to be above 1% a year in future, out-of-work Brits face a decline in their future living standards.

Also, working families will be hit by freezes or below-inflation increases to Child Benefit and tax credit. The Trades Union Congress (TUC) claims that millions of working families could lose £3,000 a year from cuts by 2015.

Brendan Barber, TUC General Secretary, reacted furiously: “This chancellor has presided over one of the biggest-ever squeezes on the budgets of working families. Small gains on fuel and the personal allowance are dwarfed by the swingeing cuts to Child Benefit and tax credits that many millions of families rely on to get by.”

Barber added: “For all the Westminster talk of fiscal rules and structural deficits, it is money at home that matters to families, and that's where they've been hit harder than anyone else. This chancellor's stealth cuts have made the biggest squeeze in living standards since the 1920s even longer and deeper, especially for those with children.”

Bleak growth means tough times to come

The chancellor also revealed sharp drops on the estimates for Britain's economic growth. The Office for Budget Responsibility (OBR) now expects our economy to shrink by 0.1% this year, instead of growing by 0.8%. For 2012, the growth forecast has been slashed to 1.2% from 2%, with further falls in later years.

Investment firm Schroders seized on these downgrades to warn that Brits face more years of personal austerity. The firm cautioned: “Overall, the chancellor's Autumn Statement offers little in the way of support for the overall economy in the near term. The Chancellor has missed an opportunity to go further and lock in long-term near-record-low borrowing costs to help support badly needed infrastructure spending in the UK.”

Schroders was also pessimistic about the UK's ability to hang onto its top 'AAA' credit rating, which enables Britain to borrow at very low rates of interest. “The latest downgrades to growth and public finances are likely to raise questions once again about the government's coveted 'AAA' sovereign debt rating. It will be important for the chancellor to give a positive report in the spring Budget. Further fiscal slippage caused by weak growth from here could result in the loss of the UK's ‘AAA' rating.”

Pension contributions curbed

As widely predicted, the chancellor is to reduce the tax benefit for well-off workers paying into pensions.

Osborne did not reduce or scrap the 40% or 50% tax relief given to high earners making pension contributions. However, with effect from April 2014, he will reduce the lifetime limit for the size of pension pots from £1.5 million to £1.25 million. Also, the yearly limit for tax-free contributions will fall by a fifth from £50,000 to £40,000.

Following this news, Jamie Jenkins, head of workplace strategy at leading pension provider Standard Life, responded: “It's unfortunate the Government has taken the decision to reduce the annual and lifetime allowance for pension contributions for the second time in three years. But it's helpful the implementation is not immediate, giving people time to plan. Following today's announcement, a period of stability is needed.

“People need to continue to save for their retirement and we must remember that this change to the limit on tax-efficient pension contributions only affects about 1% to 2% of the population. For the rest, pensions continue to be an attractive and tax-efficient way to save for our retirement.”

A shot in the arm for savers

Despite reducing the relative attractiveness of pensions, the chancellor upped the ante for ISAs: the UK's most popular tax haven, used by 20 million savers and investors. In this tax year, up to £11,280 can be sheltered from tax inside an ISA, which doubles to £22,560 for couples. The good news is that this limit will rise by £240 (£480 for couples) from 6 April 2013.

In what it described as a “double boost for savers”, Tony Vine-Lott - director general of the Tax Incentivised Savings Association (TISA) - welcomed higher savings thresholds: “It is good to have the increase to ISA subscription levels in line with the Consumer Prices Index confirmed. For the first time, the increase is being extended to Junior ISAs and Child Trust Funds and will provide a welcome boost to children's savings.”

On the other hand, the chancellor got a no-nonsense knockback from Ros Altmann, the director-general of Saga. In a scathing response, Altmann warned: “There is little cheer for savers. The chancellor says low interest rates are good and show signs of credibility in his policies, but they also cause problems for some important sectors of the economy, notably savers and pension funds.”