Contact: Danielle Anthony
Deloitte
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In macro terms this was one of the least significant budgets in living memory. The net giveaway in the coming year was a mere £400 million, counterbalanced by £400 million claw back the following year. We now know why there were no pre-budget leaks. For even the most imaginative of Treasury officials it would have been nigh on impossible to find anything worth leaking.
The reason for the lack of major measures is that, having taken the pain of accepting downward revisions to the growth forecasts and upward revisions to the borrowing forecasts last December, and with the economy now having stabilised, there was no immediate pressure to do anything.
In fact, this was a political budget and a piece of parliamentary theatre, rather than an exercise in economic management. I had thought that politics would push the Chancellor towards raising taxes in order to put the government in a stronger position in the run up to the next election. In the event he probably made the judgment that to put up taxes now would be damaging to him, as he prepares to take over as Prime Minister, and damaging to the government, as it would hand Mr. Cameron’s revivified Conservatives a powerful weapon. Indeed, by not doing much at all the Chancellor may have been seeking to convey the message that everything is fine and on course.
But there is no such thing as a free lunch. What this decision has done is to increase the risk that continued high borrowing figures will hand Mr. Cameron a weapon in later years and that tax increases are needed to put the public finances back on a sound footing. My analysis is that without tax rises, by 2008/09, borrowing is likely to be some £10 billion higher than the Treasury forecasts.
Moreover, these figures assume that the government sticks to the tight growth path for public spending outlined in official plans. But political pressures will be strongly against this.
All is now staked on a revival of the economy next year. But there is no assurance that growth will bounce back. The two major drivers of recent years, consumer spending and government spending, are now taking a back seat, while there is no evidence that corporate investment and exports will take their place. Indeed, the world economy remains fragile, and UK consumers are laden with debt. Meanwhile, the UK’s competitive position appears to be deteriorating.
The decision to increase the proportion of long dated gilts issued was widely expected and was largely embodied in the price of long gilts before the announcement.
The budget will have no influence on the course of interest rates – or indeed on anything else.
Notes to editors
Visit our dedicated Budget website www.ukbudget.co.uk.
Download our detailed Economic Commentary (82KB, PDF)
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