- Gordon Brown presents his ninth Budget on Wednesday 16th March against a pretty favourable economic backdrop. As he will no doubt remind us, his prediction a year ago that the economy would grow by at least 3% in 2004 – met with scepticism at the time – proved correct.
- But there are reasons to doubt that such a strong performance can be maintained in 2005, as the Chancellor has predicted. Not only do his numbers allow for very little slowdown in household spending growth, but they also incorporate very strong growth in exports.
- While the economy has lived up to the Chancellor’s expectations, the public finances have not. Current borrowing looks set to overshoot Mr Brown’s forecast by £5bn or more this year, eating into the already wafer thin margin built into the Golden Rule.
- Whether or not the Golden Rule is technically met in this cycle, the big picture is one of a major deterioration in the fiscal position over the last five years. And Mr Brown’s latest forecasts envisage only a gradual improvement.
- Accordingly, whoever is Chancellor after the general election is likely to want to put borrowing on a more decisive downward path. We continue to expect post-election tax increases of the order of £10bn per annum.
- For now, though, the combination of political pressures and the small amount of leeway against the Golden Rule points to a modest package of tax cuts and spending increases in this Budget. We expect a giveaway of some £3bn, targeted at pensioners and families.
- With the interest rate outlook finely balanced, even a modest fiscal loosening could increase market nerves over further rate hikes and put upward pressure on bond yields and the pound. But we continue to expect interest rates to fall later this year as the housing market and economy slow.
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