Chancellor says the state of the public finances leaves no room for tax cuts, while Ed Balls highlights fall in living standards
George Osborne is relying on the Bank of England and Britain's resurgent housing market to deliver strong growth in the runup to the 2015 general election after he spurned the chance to use a surprise pick-up in the economy this year to ease the government's austerity programme.
In an upbeat autumn statement that left his Labour shadow Ed Balls struggling, the chancellor produced plans to shrink the size of day-to-day state spending to its lowest level for at least 70 years and sought to neuter Ed Miliband's cost-of-living campaign by using the proceeds of the squeeze to trim domestic fuel bills by £50 a year, freeze fuel duty for motorists and limit increases in rail fares.
Osborne said the state of the public finances left no room for tax cuts, although the City believes a fresh surge in the housing market expected next year will leave scope for pre-election giveaways. Interest rates are expected to remain at 0.5% until after the general election.
"This statement shows the plan is working. It's a serious plan for a grown- up country", the chancellor said as he warned voters that Labour would put any economic recovery at risk.
"We have held our nerve while those – who predicted there would be no growth until we turned the spending taps back on – have been proved comprehensively wrong. Thanks to the sacrifice and endeavour of the British people, I can today report the hard evidence that shows our economic plan is working."
He announced forecasts from the Office for Budget Responsibility (OBR) showing that the economy would grow by 1.4% this year and 2.4% next year – up from the 0.6% and 1.8% predicted in the March budget. "But the job is not done," Osborne added. "By doing the right thing, we're heading in the right direction."
The OBR said that the acceleration in growth during 2013 had been the result of consumers running down savings to fund higher spending, and said productitivity would need to improve in order to "sustain the recovery and raise living standards". But it said hopes for an increase in business investment this year had not been met and the UK's trade performance had been worse than expected.
Osborne said that the consumer-driven pick-up in the economy was still not strong enough and left the budget deficit too high for the government to ease up on austerity. He said he would support companies by limiting the increase in business rates to 2% and spent £500m abolishing national insurance contributions for workers under the age of 21.
But he said measures to tackle what Labour has called Britain's cost of living crisis had to be paid for by a cap on all welfare spending, apart from pensions and unemployment benefits, and a fresh squeeze on Whitehall departments. The independent OBR said that by 2019 the share of national income spent on the day-to-day running of the state would be the lowest since at least 1948 when modern records began.
Osborne said he wanted a "responsible recovery" and while warning of "more difficult decisions" to come he accepted the effects of Britain's deepest postwar slump were still being felt on family budgets.
Stronger growth meant that the government needed to borrow £73bn less over the next five years than originally envisaged in the spring and that the national debt would peak in 2016-17, a year earlier than previously predicted, the chancellor said.
But Robert Chote, the OBR's director said the upgrade was the result of a cyclical pick up in consumer spending and the housing market rather than a structural improvement. "Borrowing is lower but the hole that the government will eventually have to fill in doesn't appear to be any smaller than it was in March," Chote said.
The OBR is expecting house price inflation of above 5% in 2014 and 7% in 2015, with the Exchequer seeing a near doubling of property stamp duty from £9bn to £17bn between 2103-14 and 2018-19.
Osborne told MPs: "This country is working through its long term plan. Bringing down the deficit and dealing with the debt.
"Spending less on welfare and making the big decisions on infrastructure. Living within our means and cutting tax on business. Making work pay and letting people keep more of what they earn."
But Balls said Osborne was borrowing £198bn more than he planned in 2010. "More borrowing to pay for three years of economic failure. More borrowing in just three years under this chancellor than under the last government in 13 years.
"He used to say he would balance the books in 2015. Now he expects us to congratulate him for saying he'll do it by 2019."
Balls brushed aside suggestions that his shouty performance in the Commons had damaged him saying "there were 350 Tory MPs shouting at the top of their voice because they don't want to hear the truth about the cost of living crisis in our country".
He said Osborne "was in denial about the way in which living standards were still falling".
He insisted that the chancellor's plans for faster spending cuts, a welfare cap and a proposal to ask MPs to vote next autumn for faster than expected fiscal consolidation in the three years after the election would not cause him problems. But he faces a difficult judgment whether to accept the Tory timetable for fiscal reduction, or back a slower pace.
He also said he may call for tax rises as well as spending cuts to scale back the deficit.
The business secretary, Vince Cable, also emphasised that, like Balls, the Lib Dems would not be forced to accept the plan for Conservative deficit reduction, which envisages for more than 80% to come from spending cuts, even if they might accept the timetable.
Cable said: "The Liberal Democrats are an independent party … Liberal Democrats have a different approach to tax and spend, in particular with an emphasis on fairness in the way the tax system operates, and our achievements in lifting low earners out of tax.
"Ultimately the electorate has got to decide what the outcome of the next election is but we will go into it as a distinct party with a distinct agenda."
Cable also sounded a warning note, saying the housing market was "very buoyant". He said: "There's clearly still a danger of house prices getting out of control."