05/12/2012 10:13 GMT | Updated 04/02/2013 05:12 GMT

Chancellor Visits the 'Magic Money Tree'

In keeping with the pressures of Coalition politics, the measures announced by the Chancellor in the Autumn Statement have something for the Conservative backbenches and something for the Liberal Democrats, but rather less than either would have wished.

The Conservative backbenches get cuts in welfare spending. Measures to limit increases in many benefits to 1% a year for the next three years, together with another attack on fraud and error are expected to save £3.7 billion by 2015-16. In an interview over the weekend, the Chancellor said it was only fair that those 'living a life on benefits' contribute to getting government borrowing down. In fact, 56% of jobseekers allowance claimants have been doing so for less than six months and can hardly be described as 'living a life' on benefits.

Normally these benefits would have been increased in line with consumer price inflation in September 2012 - by 2.2%. The early talk was of a freeze in the value of these benefits but it seems that pressure from the Liberal Democrats resulted in the compromise of a below inflation increase.

The Liberal Democrats get a reduction from £50,000 to £40,000 in the amount of money that can be paid tax-free into a pension in any year and a cut in the lifetime allowance from £1.5 million to £1.25 million. This will save the Exchequer £1 billion. The Director-General of the CBI, John Cridland, has described this as a move that 'would hit swathes of middle class earners'.

Back in the real world, most people would regard someone earning £50,000 as being a middle class earner and someone who could afford to put £50,000 into a pension as being at the top end of the income scale. Cridland is right, however, when he says that this move is an increase in income tax, not a wealth tax. The Liberal Democrats have championed wealth taxes - in the form of a mansion tax on properties worth £2 million or more - but the Conservative wing of the Coalition continues to rule them out.

The Chancellor also visited the 'magic money tree' of efficiency savings. He is requiring most government departments (health, education and international development are exempted) to find additional savings of 1 per cent in 2013-14 and a further 2 per cent in 2014-15. Despite the fact that these cuts come on top of already swingeing reductions in funding, he thinks they can be delivered through efficiency savings rather than through cuts to front-line services. A reasonable person might ask why there are still efficiency savings on this scale still to be made. The money saved, £5 billion, will be used for capital spending on transport projects and schools and to boost the science budget.

The announced increases in capital investment are welcome but the fact that they are funded by cuts in other areas of public spending mean the Chancellor is merely shuffling money from one pot to another, which will do nothing for growth. More help with childcare, rather than increases in the Personal Tax Allowance, should have been given to working families, who will also now see their tax credits cut further in real terms.