UK Autumn Statement Preview: What Will George Osborne Do as Recovery Dawns?

We are approaching something of a rare moment for the UK economy and certainly a unique occasion for Chancellor George Osborne.

While the country's battered economy is far from fully recuperated, it is at least recovering, or so the signals tell us. And it is with that abnormally positive backdrop for the post-financial crisis Britain that Osborne will deliver his Autumn Statement on 5 December.

Public finances are improving, though the pain of austerity still stings across the open wounds of slashed government departments. Output growth is accelerating, with the rate of GDP expansion going from 0.3% in the first quarter to 0.8% in the third.

Wages are still in real terms decline, but forecast to start rising again in 2014. Europe looks to be emerging from its darkest economic period in modern history, something that is crucial for the UK recovery given it is our largest export market.

"Autumn Statements have been a miserable affair in recent years, with GDP forecasts slashed and public sector borrowing projections ballooning further out of control," said Ross Walker, RBS economist.

"This year feels different. Whilst the UK's fiscal metrics remain among the worst in the world, there is a discernible underlying improvement in the data and it is the change rather than the absolute which will set the tone (if the markets fail to recognise the extent of the improvement then the Treasury has only itself to blame given the numerous - and invariably helpful - transfers and accounting practices)."

In its own analysis ahead of the Autumn Statement, the Institute for Fiscal Studies (IFS) said: "No doubt Mr Osborne would like to be able to use any fall in borrowing to justify a significant net giveaway in the Autumn Statement: not least because of the cost of the measures announced at the Liberal Democrat and Conservative Party conferences."

The three significant announcements account for £2bn a year in spending. They were universal free school meals for those in their first three years at primary school from September 2014 (£600m a year); a transferable income tax allowance for some married couples from April 2015 (£700m); and an aspiration to cancel the increase in fuel duties currently planned for September 2014 (£700m).

"So, should Mr Osborne implement all these measures - and possibly more - without any offsetting tax rises or spending cuts?" said the IFS.

"In both Autumn 2011 and Autumn 2012 Mr Osborne reacted to a worsening outlook for the public finances by allowing projected borrowing to rise considerably over this parliament and pencilling in further spending cuts for the next parliament.

"A symmetric approach to good news would be to plan to borrow less in this parliament and to reduce the amount of austerity planned for the next."

So what can we expect from the Autumn Statement?

Cost of living

Energy bills have been at the fore of public consciousness in the approach to winter. There have been angry protests at bills rising far ahead of wage growth. Squeezed, poorer households having to choose between heating or eating because they cannot afford both. And data showing significantly more pensioners suffering winter-related deaths during 2012/13 than the previous year.

The Big Six energy firms blame rising bills on higher costs from much-needed infrastructure investment to rising wholesale prices. They also blame green levies from the government, which are passed on to consumers, for pushing up household bills - and that's where many expect to see Osborne stepping in.

To the ire of those concerned about climate change, Osborne looks likely to scrap the green levies on energy firms - taxes used to fund things like insulating homes under the Warm Homes Discount - or at least put the burden on general taxation rather than the industry.

This is seen by the government as its best shot at knocking down energy bills, or at least limiting how much they rise by, after Labour leader Ed Miliband pledged to force firms to freeze their prices for almost two years if elected in 2015.

It isn't just energy bills that have made for what Labour is dubbing the "cost of living crisis". The government has sought to put more money into people's pockets by lifting the personal allowance threshold - the point at which an individual starts to pay tax on their income - to £10,000 by 2014/15.

This has been a popular move, despite research from the Trades Union Congress (TUC) showing the poorest workers have lost out four times as much from the VAT rise to 20% in January 2011 than they'll get back from the increases in the personal allowance.

The Association of Certified Chartered Accountants (ACCA) said it expects Osborne to announce that by 2016 the personal allowance will be lifted to £12,500.

SME finance

There has been a strong focus on supporting the flow of credit to small firms through a number of mechanisms in recent years, which a crunch on credit availability seen as having held back the UK economy because firms cannot borrow to invest jobs and expanding output.

The Bank of England's Funding for Lending Scheme (FLS) has been re-focused entirely on business credit and away from residential mortgages, which it helped bring down the cost of.

FLS is a window through which banks can access cheap wholesale funding up to a value tied to their stock lending to consumers and small firms.

Similar schemes exist to support export finance and another offers government guarantees, but despite this eco-system for business credit there are reports that borrowing costs are rising for many firms.

Manufacturers' organisation EEF said in its quarterly credit conditions survey that the portion of businesses with no need to borrow fell to 40%, its lowest level since the report was started in 2007. However, the cost of credit rose to a balance of +11%, the highest reading since the end of 2012.

Osborne may see this as a risk to the UK recovery and look for ways to further support business lending so the economy and job creation aren't held back by a lack of credit.

Improving UK forecasts

Given the better-than-expected growth across the first three quarters of 2013, private industry surveys suggesting output in the three main sectors is soaring to pre-crisis highs, and that global markets are also on the up, we can expect the Office for Budget Responsibility (OBR) to hand Osborne a decent set of revised UK forecasts to read out in his Autumn Statement.

It will be a marked change from previous budgets and statements when Osborne has been haunted by a worsening outlook and talk of an unprecedented triple-dip recession.

Philip Shaw, an economist at Investec, said the OBR "will almost certainly upgrade its own predictions."

"Economists rarely enjoy admitting to forecasting mistakes and over the past couple of years the chancellor has had to contend with a series of downgrades to the economic outlook. On this occasion though the chancellor will be in a much more comfortable space," he said.

Housing

There is a serious shortage of supply in the UK's housing market and, amid support for the flow of mortgage credit through the Help to Buy scheme, the government has been accused of risking a house price bubble.

To fight back against this criticism, we may see Osborne offer tax incentives for builders to encourage more housebuilding. Or support in some other form such as through lending guarantees to de-risk funding for firms looking to construct affordable homes.

"Addressing the housing crisis is an urgent and pressing need," said anti-poverty thinktank the Joseph Rowntree Foundation.

"Higher housing costs not only directly impact on living standards but they also increase the welfare bill.

"A sustained increase in housing supply is needed to improve housing affordability, requiring both national and local leadership to take a responsive growth-focused approach to housing supply and planning policy.

"This includes a flexible approach to greenbelt designation such as green belt swaps and a more pro-active planning role in the land market, including land assembly and rolling infrastructure funds."

Tax avoidance

With austerity gripping many countries across the world, focus on tax avoidance and evasion has intensified. Public anger at firms who slip through loopholes in domestic and global tax rules is on the rise as they see services cut and their own incomes diminish.

Governments have reacted by agreeing to new standards and principles. There have been information-sharing deals to shine a light on who owns what companies and where money is being shipped to as firms try to avoid the taxman's grip.

ACCA said it expects base erosion and profit shifting to be explored further by Osborne in his Autumn Statement, in a bid to crack down on money being exported away from HMRC's clutches.