4th December 2012
As the economy struggles to find light after a long recession the focus is on Chancellor George Osbourne's Autumn Statement tomorrow. Where will he wield his axe, and what measures will be taken to tackle the state of public finances?
While the raft of announcements on spending and taxation are typically reserved for Budget day, there can be no doubt that the government is under more pressure than ever to raise revenue.
So what, asks Mindful Money, can we expect?
The raid on pensions
Savers battered by falling rates may have taken solace in tax relief offered on their pension contributions, but this could be restricted in the Chancellor's statement with a further cut to the current £50,000 annual allowance.
The Conservatives, as the lead partner in a coalition government, have already slashed the annual tax allowance for pension saving from £255,000 to £50,000, but it's expected that this has further to sink to raise revenue.
A cut in this limit to £40,000 would save the Treasury £600m a year, according to an estimate published by the government last December. However, some, such as insurer Standard Life, say a more significant cut to £30,000 would save around £1.8 billion.
In April last year the Chancellor was expected to lower the allowance to between £30,000 and £45,000 – so forecasters expect he may take advantage of this tomorrow.
As a result, a wide range of savers, including the self-employed who slot hefty chunks into their pension every year, and public sector workers who receive large employer contributions into defined-benefit schemes, will be worse off.
Ed Wilson, pensions director at accountants PricewaterhouseCoopers, says: "There are various groups who will be affected, from those in old-style defined contribution schemes getting pay rises, or even those on relatively modest salaries could be caught.
"The other group is those in defined benefit schemes who haven't been saving enough for retirement and are now trying to catch up – they will really feel the impact of a lower annual allowance as their ability to save will be restricted."
However, Tom Stevenson, investment director at Fidelity Worldwide Investment, says it's not so much the reduction that matters. "It's the message it sends out that whenever the government needs some cash the promises it has made you about your pension are pretty worthless."
A wealth tax
While a "mansion tax" has been ruled out, seeing homes worth more than £2m face annual charges, the wealthy could face higher taxes.
Options under consideration include new higher rates of council tax for more expensive homes and increasing stamp duty on high-value property sales.
These could be outlined in the Autumn Statement, although experts believe the biggest impact on the wealthy is likely to be a raid on pensions.
The Chancellor is expected to unveil more details for a £1bn 'Business Bank' to boost lending for small and medium-sized companies, after Vince Cable announced plans for it earlier this year.
The Confederation of British Industry (CBI) has called on the Chancellor to use his statement to get the business bank up and running.
Alongside this, the Chancellor is expected to reveal the first infrastructure projects to benefit from the state's £40bn of guarantees, and tax breaks for shale gas developers and venture capitalists.
There is also expected to be £5 billion of export finance loan guarantees to help smaller businesses, and a doubling of the capital investment allowance to £50,000 to get small companies spending.
Chris Morgan, head of tax policy at KPMG, when asked what single measure in the UK tax or regulatory regime the government should introduce, said tax relief on infrastructure or capital investments was the stand out leader.
Osborne said at the Conservative party conference that he planned to cut £10 billion from the welfare bill by 2017. This is on top of the £18 billion of cuts announced in 2010.
Benefits may also be frozen, so they won't rise in line with inflation. Working tax credit and child benefit have already been frozen, but freezing all benefits could save the government £2.5bn a year, according to the Institute for Fiscal Studies (IFS).
Fuel and other tax announcements
PWC suggests the most likely tax announcement will be a cancellation of the planned 3p rise in fuel duty in January to ease hard-pressed consumers. The British Retail Consortium has been calling on the Government to cancel the rise.
Osborne is also is likely to reaffirm his intention to increase the personal tax allowance to £10,000 by April 2015, with a rise in April 2013 already announced.
Reducing tax avoidance has been a key feature of Mr Osborne's budget statements in the past, so there may be more to say on this. The Treasury will give HMRC an extra £77m to help it track down wealthy individuals and companies who tried to avoid paying tax.
Alongside the statement, there will be economic forecasts from the Office for Budget Responsibility (OBR). Expectations are for a downgrade in forecasts as its previous figures now look wildly optimistic; in March the OBR forecast 0.8% growth this year, 2% next year and 3% growth by 2015.
According to the IFS, forecasts say the economy will shrink this year, grow by no more than 1% next year, and by 1.5%-2% between 2014 and 2016.
The poor state of the economy, according to the IFS, means that tax revenues are likely to come in £17 billion less than forecast this year, while the size of the budget deficit is set to be £10 billion bigger than it was last year.
Most say the Chancellor will announce an extension to the current austerity programme for another year, imposing spending cuts until 2018 to meet the first deficit reduction target.
The second target, of reducing debt as proportion of national income, according to most economists, will be missed. This risks losing Britain its golden AAA credit rating following the UK being put on "negative outlook" in March by ratings agency Fitch.