Autumn Statement 2013: George Osborne forces Labour into a fiscal straitjacket

George Osborne has set a political trap for Labour by challenging the party to sign up to tough fiscal rules that would mean billions of pounds of new spending cuts after the 2015 general election.

In a highly political Autumn Statement, the Chancellor announced that Parliament will vote on a new “charter for budget responsibility” before the election. His aim is to set the terms of the election battle to give maximum advantage to the Conservatives, who will pledge to run a budget surplus once the annual deficit has been wiped out in 2018-19.

The rules will say that any annual surplus should be used to pay off the remaining stock of debt. “This time we will fix the roof when the sun is shining,” Mr Osborne told the Commons.

But the Chancellor’s plans for a “responsible recovery for all” were dealt a blow when the independent Office for Budget Responsibility (OBR) warned that house prices will jump by 3.2 per cent this year, 5.2 per cent next year and 7.2 per cent in 2015, meaning that it expects homes to cost 10 per cent more by 2018 than it previously predicted. Labour and some Liberal Democrats said that brought into question the merits of the Government’s Help to Buy scheme which guarantees 95 per cent mortgages, but which critics claim could inflate another housing bubble. Labour warned that home-buyers would be “back to square one” if prices rose sharply and they were unable to get a mortgage. But Mr Osborne said the OBR’s new forecasts still left house prices 3.1 per cent lower than their 2007 peak.

In a statement that contained few surprises, the Chancellor confirmed limited “giveways”, including a tax break for married couples; free school meals for all five- to seven-year-olds and the scrapping of a 2p rise in fuel duty due next September.

He trumpeted higher than expected growth and lower borrowing forecasts. Trailing the Conservatives’ election campaign, he said: “Britain’s economic plan is working. But the job is not done. We need to secure the economy for the long term.”

The Chancellor’s election gambit creates a huge dilemma for Ed Miliband and Ed Balls, the shadow Chancellor, who was drowned out by Tory MPs when he responded to the statement. Labour has pledged to stick to the Coalition’s day-to-day spending plans for the first year after the election but intends to borrow more to fund building projects such as a huge housing programme.

The Tories will brand Labour irresponsible if it does not vote for the new charter. But Mr Miliband is determined to “be bold and be different”. His allies fear the public may stick with the Tories if Labour appears to promise more of the same austerity.

Labour hit back, with Mr Balls accusing Mr Osborne of “playing politics” and vowing that Labour would not be deflected from fighting the election on the “cost of living crisis”. Mr Balls said the figures published on Thursday showed that working people in 2015 would be £1,700 worse off on average than they were when David Cameron became Prime Minister, up from the previous estimate of £1,600. He also said that wages would fall by 5.8 per cent over the five-year term of this parliament. Labour will hammer home the message in its election campaign, accusing the Tories of being “out of touch” and failing to understand the huge problems that ordinary people face because wages have lagged behind inflation – a trend that Mr Osborne said would finally be reversed next year.

The Liberal Democrats also face a difficult decision over Mr Osborne’s opening election shot, with some party figures anxious to avoid a commitment to more “Tory cuts”.

Nick Clegg has signed up to the idea of a new “fiscal framework” which uses budget surpluses in good years to bring down debt. But he will part company with the Tories by insisting that the deficit should be cleared partly by higher taxes – such as a mansion tax on homes worth more than £2m– rather than solely via cuts as the Tories propose.

Vince Cable, the Business Secretary, said last night: “The Liberal Democrats are an independent party. We will go into the election with our own identity, equidistant from the other two parties and with a completely different set of policies. We will not be locked into a Tory agenda.”

Mr Osborne also set out plans to impose a cap on welfare spending for the first time – and will again challenge Labour during the election campaign to support it. Jobseekers’ allowance, housing benefit for the unemployed and the basic state pension will be exempt. But the move could open the door for pensioners’ perks such as winter fuel allowances, free bus travel and TV licences to be pared back.

The squeeze on public sector pay will continue, with annual rises limited to 1 per cent. But in a pilot scheme, some government organisations will be given the freedom to make the trade-off between pay and jobs.

One Treasury source said Mr Osborne believed Mr Balls would be exposed if Labour voted against the new fiscal rules.

But independent think-tanks raised Labour’s hopes of making living standards the key election issue. Paul Johnson, director of the Institute for Fiscal Studies, said: “We’ve had the biggest recession we’ve had in 100 years … It looks like in 2015 people will be no better off than they were in 2001.”

Matthew Whittaker, senior economist at the Resolution Foundation, said: “The much-delayed recovery in earnings is being delayed still further. Although average wages are forecast to outpace inflation for the first time in six years in 2014, there’s a lot of ground to make up. For typical workers, pre-recession pay levels are unlikely to return before the end of the decade.”