As expected, this Budget contained no substantial new tax measures, and no substantial changes to government spending. The main interest was in the change to the Treasury’s economic forecasts and the associated projections for government borrowing.
In the event, despite gloomy words from the Chancellor in his speech amid warnings about the slowing world economy and the turbulence in financial markets, the growth forecasts for this year and next were trimmed only marginally, by 0.25% in both years. This meant that the Chancellor adhered to the view that after slowing this year, the economy will pick up speed again next year. And by 2010, growth is back to its original forecast path at 2.5%-3.0%. So the impact of the global credit crunch on the UK’s economic performance is apparently minimal.
Indeed, because of higher inflation in the near term, by 2010/11, the projected level of GDP in money terms, which governs the level of tax receipts, is actually higher than previously forecast.
Accordingly, the Chancellor’s substantial downgrade to the fiscal projections was a surprise. Borrowing is £7bn higher next year and in 2009/10.
The reason is that the Chancellor has reduced the projections for the ratio of tax receipts to GDP, because of a presumed weakness of receipts from stamp duty, reflecting lower transactions in both houses and shares, and because of lower VAT receipts, reflecting slower growth of consumer spending. This change is realistic but there are doubts as to whether it went far enough.
For this Budget did nothing to try to ease economic pressures and indeed, aside from the cautious words in the Chancellor’s speech, barely acknowledged them. Accordingly, the Chancellor’s projections are highly exposed to the deteriorating economic environment.
In particular I reckon that economic growth will probably be weaker next year than this and I forecast it a good 1% lower than the Chancellor. Moreover, I believe that there is a substantial risk that growth proves to be even weaker than this, and/or that the period of weak growth extends into 2010 and beyond.
My central forecast envisages borrowing hitting £50bn in 2009/10, but on this more pessimistic economic scenario it could easily be tens of billions higher.
The Chancellor’s projections, and the reputation of the whole government, rest on his comparatively sanguine view of economic prospects. I think that it will be proved wrong.
Roger Bootle
Economic Adviser to Deloitte
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