Autumn Statement: Osborne remains the Edward Scissorhands of fiscal policy

George Osborne’s general approach to managing the nation’s finances could be described as chopping off bits and pieces here and there as he goes along, which would make him the Edward Scissorhands of fiscal policy. Against this backdrop, the decision announced in the Autumn Statement to speed up the increase in retirement age is an uncharacteristically long-term and systematic step, especially because it seems to reflect some kind of implicit indexation to life expectancy. The intention that the time spent in retirement should be limited to around one third of adult life seems like a sensible enough rule of thumb. It will go some way towards easing the heavy burden of implicit government debt, and there might even be positive side-effects on health.

The shift of subsidies from onshore to offshore wind energy, however, is madness. Offshore wind is almost twice as expensive per megawatt hour of energy as conventional energy sources. The cost of onshore wind is about half way between conventional sources and offshore wind, so while both forms of wind energy are a waste of money, the onshore variant is the lesser evil. No prizes for guessing the crude politics behind this move: onshore wind turbines are highly visible, which is why they upset the nimbys, probably the one electoral group which the government is most terrified of. Sensible opponents of wind energy often mistake anti-wind farm nimbys for their allies, but Osborne’s subsidy reshuffling may now drive a wedge between these two groups. While both groups oppose onshore wind farms, they do so for completely different reasons. Sensible critics realise that this form of energy is economically wasteful and environmentally ineffective, crowding out relatively low-cost carbon abatement strategies and replacing them with the least cost-effective ones. Nimbys, in contrast, simply don’t like the sight of human activity anywhere near where they live, with economic arguments serving at best as post-hoc rationalisations of that antipathy. From the latter group’s point of view, having less onshore and more offshore wind generation solves the problem: out of sight, out of mind. For the former group, however, the shift does nothing to solve the problem, and it may even aggravate it. If the measures announced in the autumn statement are a deliberate strategy to split the opposition to wind energy, it was a shrewd move. Terrible economics, sure, but clever politics.

The announcements to go ahead with reductions in business taxation are generally laudable, but as previously, there are too many special rebates and selective exemptions. There is too little emphasis on simplicity and neutrality, and too much look-how-much-we’re-doing-to-support-enterprise. Somebody should send the Chancellor a copy of the Mirrlees Review.

The same goes for changes to household taxation. The decision to make the personal allowance for income tax partially transferable between partners is clearly a good thing, but implemented in this way, it will also unnecessarily increase the system’s complexity. This is because it mixes two different approaches to taxation. You can either base income taxation on individual incomes, or you can base it on household incomes, but it makes little sense to mix those two approaches. Yet the coalition will do precisely that, creating a mixed system of income taxation. They should have gone the whole way, and made the personal allowance fully transferable within a household as the partners see fit. Ideally, this would also have included replacing Child Benefit with a child tax allowance.

So there is some good news in the Autumn Statement, but the short summary remains: Move on folks, nothing to see here.

Hi, I am a reader from America and I have read the Autumn Statement and am agree with the Chancellor that Britain is moving "even faster than America" and I also read the response from the Adam Smith Institute and found this review echoing similar sentiments. When reading this post I agree when you say that the Chancellor is taking "bits and pieces" and I have to say that is what the politicians do here in America, making long term reforms instead of the real big reforms, I guess its the politics. Great article.

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