Agenda: We dodged a fiscal bullet but we are still in the line of fire

As a consequence of the windfall gains from the OBR forecast, the Chancellor managed to appear in almost giveaway mode while sticking to his fiscal rectitude guns.

Given that one consequence of the new OBR expectations will be significantly less of a hit on Scotland than anticipated, John Swinney should be nearly as grateful as Mr Osborne. Perhaps he will consider giving enhanced powers to the embryonic Scottish Fiscal Commission.

This latest Autumn Statement was always going to be as challenging a major economic policy pronouncement as Mr Osborne had ever faced, with potentially major implications for Scotland. Given the constraints he faced he was expected to be tough in areas where the ramifications for the Scottish Budget (to be announced next month) and the Scottish focus on greater equality would be severe. As noted by the Finance Secretary, the risk was that “the poorest would be hit the hardest”.

Mr Osborne knew that the global and UK economies were slowing. In addition, he would have been aware that, within the UK, the Scottish economy was relatively weak. Against this unprepossessing backcloth, the Chancellor had boxed himself into a self-imposed necessity to tighten fiscal policy substantially, primarily via major cuts in public expenditure and welfare.

At the same time, the health service in England (and Scotland) was crying out for more, as were defence and security; and cutting the police budget could have proved a major own goal after recent events. Hence the expectation of swingeing cuts across a number of other departments in order to achieve his target (before yesterday) of £20 billion in cuts and some major welfare raid following the defeat in the House of Lords over tax credits.

In the event, he abandoned altogether the £14bn of tax-credit cuts, admitting his welfare spending ceiling would be broached next year, but no further than that, and leaving for another day clarity as to how that saving on the welfare front would be achieved. We wait and we watch.

On the departmental spending front his pre-planned focus had been on massive cuts across those departments he had not ring-fenced. We got big cuts, but nowhere near as severe as expected. The planned £20bn went down to a "mere" £12bn. Mr Osborne also found scope for a £12bn increase in capital spending, and we should all support greater focus on infrastructure spend.

No doubt hidden gems of revenue increases and spend reductions will emerge. We know his apprentice levy should raise £3bn and changes in stamp duty (for non doms and so on) some £4bn. There will be more tucked away in the fine print.

The direct impact on Scotland is via the block grant. Overall the block grants for Scotland, Wales and Northern Ireland will be protected in real terms over the period of the spending review. Within this total, capital spend increases while resource funding falls. Over the period to 2020-21 capital funding will increase by some £1.9bn in real terms, or an increase of £16.5bn in total over the duration of this UK Parliament. At the same time, resource funding will fall by an average of 1.3 per cent each year.

How these funds are to be allocated will be essentially a matter for the Scottish Government. But if it chooses to safeguard health and education, the cuts required elsewhere will be of substance but not as dramatic as would have been anticipated before yesterday.

In sum, this all amounts to something of a relief for both the UK Chancellor and the Scottish Finance Minister. But do not relax yet. More welfare cuts are on their way. Also, there was nothing to boost growth, assist the oil sector or increase business investment and productivity. The old challenges remain but it still feels as if we dodged a fiscal bullet.

Jeremy Peat is visiting professor at the University of Strathclyde International Public Policy Institute.