Economic Implications
Implications by Andrew Smith, Chief Economist, KPMG LLP (UK)
The Chancellor bowed to the inevitable after the dramatic fall in UK output over the last six months. Rather than the shallow recession forecast in November's Pre-Budget Report, he now expects output to drop by 3½ percent this year. A recovery is still forecast in 2010 with growth of 1 percent, rising to over 3 percent in 2011.
Consequently, the public finances have deteriorated even further. Lower economic activity is resulting in collapsing tax revenues on the one hand and rising public spending, particularly on unemployment benefits, on the other - making huge budget deficits inevitable.
From 2-3 percent of GDP in recent years, government net borrowing reached 6 percent in 2008-09 and is projected to double to 12 percent this financial year, declining only slowly to 6 percent by 2013-14. Public debt will double to 80 percent of GDP over the period.
Against this background, the Chancellor found little room for any additional fiscal boost to support the economy this year. November's measures, principally the ongoing temporary VAT cut, represent a loosening of about £16bn (1 percent of GDP) and the new measures add only a net £5 billion.
Looking further ahead, Mr Darling outlined plans for redressing the deficit once the economy is on a sounder footing. In addition to plans already in the pipeline to raise National Insurance contribution rates from 2011 and a squeeze on public spending, tax rates for the higher paid are increased further from 2010.
Much depends on the speed of economic recovery. If the Treasury's economic forecast again proves optimistic, the outturn for the public finances will be correspondingly worse.
For more information contact:
Andrew Smith
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