Sticking to the squeeze
Roger Bootle, economic adviser to Deloitte, gives his Budget 2011 predictions:
- The Budget on March 23rd will probably include some
minor measures to ease concerns over the economy and sky-high oil
prices. But the Coalition Government is not likely to
signal any significant scaling back of its planned spending cuts.
The big squeeze is still coming.
- The economic background to the Budget is a little
weaker than was anticipated by the Office for Budget Responsibility
(OBR) in its last forecasts back in November. The drop in
GDP in Q4 left growth in 2010 overall of 1.3%, compared to the
OBR's forecast of 1.8%.
- But I doubt that the OBR will reduce its economic
forecasts for this year and future years markedly. Indeed,
with inflation running well above expectations, nominal GDP growth
could be rather stronger than previously anticipated in the
near-term, with potentially positive fiscal effects.
- Accordingly, the OBR's fiscal projections seem
unlikely to alter dramatically from those in November.
However, a slightly lower starting point for borrowing and higher
oil prices could nudge the projections for the budget deficit down
a bit. This might give the Chancellor scope for a modest giveaway
in this Budget - of perhaps £3bn - though he may prefer to
put the money aside.
- Possible tax measures include the postponement or
abandonment of the planned rise in fuel duty in April and various
"pro-growth" measures such as the establishment of
enterprise zones. Meanwhile, the Government may take
another small step towards raising the personal income tax
allowance to £10,000.
- However, Mr Osborne will be anxious not to be seen to
be going soft on the deficit. Not only could this raise
long-term interest rates, but it could make the Monetary Policy
Committee more likely to hike short rates. Meanwhile, there is
still a political motivation to press ahead with the spending cuts
while they can be most readily blamed on the previous
administration.
- The upshot is that the Budget will do little to alter the scale and timing of the planned public spending cuts and the coming fiscal consolidation. Equity markets may worry about the likely adverse impact of this on the economy. But the gilt market should be reassured that the Government is sticking to the squeeze.
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