Professor David Bailey, of the Coventry University Business School, considers the pre-election Budget and some brave growth forecasts.
While Alistair Darling has finally accepted the inevitable and lowered his growth forecasts for the UK economy next year, he remains too optimistic over the UK’s growth prospects
In the pre-election Budget, Darling admitted that the economy will grow by between three and 3.5 per cent in 2011, down from his 3.75 per cent prediction that he came up with last December.
Forecasted GDP growth in the range of one to 1.5 per cent in 2010 may be about right, but growth of three to 3.5 per cent for 2011 is still much too optimistic in the context of UK trend growth over the years of 2.5 per cent, and the fact that this crisis began in the financial sector.
Downturns originating in the financial sector take longer to work through the system than ‘ordinary’ recessions.
Given the dire state of Government finances, rapid growth isn’t going to come from Government spending – which will be cut after the election anyway – consumers or firms, which are paying off debts, or the financial sector (which will take time to stabilise), but rather from exports given the depreciation of sterling. And with slow growth in export markets, and a shrivelled manufacturing sector after years of Government neglect, that growth is likely to be slow to arrive.
In fact, there wasn’t really much need for aBudget. The big decisions (e.g. bailing out the banks) have either been taken already, or postponed until after the election (like where and when the cuts will fall).
There were still a few pieces of good news in the Budget, but on the whole it was the usual mix of winners and losers depending on who you are and what you consume. Cider drinkers lose out badly – the government has finally realised that drinking cool cider is currently trendy, so they are whacking a tax on it.
Given the scale of borrowing, there was little scope of a pre-election give-away, but the Chancellor did pull one rabbit out the hat with the cut of stamp duty on properties worth less than £250,000 for first time buyers. That will be paid for by upping the stamp duty on homes worth £1 million and more. The latter will come in after April next year, so expect to see a rush in luxury home deals before then and then a slump afterwards.
On the business side of things, the Chancellor unveiled a £2.5 billion investment package for businesses to promote investment and job creation. This is good news as far as it goes. This will be paid for in part by the windfall tax on bankers’ bonuses, which has pulled in £2 billion so far.
Darling also announced that the two banks rescued by the state – RBS and Lloyds – have agreed to make a further £94 billion in business loans. Again good news.
And for small firms starved of credit, Darling said that a new Credit Adjudication Service will be created, which will give firms the right to appeal if they are turned down for a loan or overdraft. That should be interesting.
As many expected, the planned three pence rise in fuel duty was scaled back (much to the relief of motorists and the haulage sector) and the rise will instead be staged over the next 10 months with a penny going on duty in April, October and next January.
There was a freeze on all income tax bands this year, which means that taxpayers will be paying more tax on their earnings.
As previously trailed, Darling confirmed the launch of a new £2 billion green infrastructure investment fund. The fund will target green transport investment, renewable energy infrastructure and port building for offshore wind manufacturers.
The Government also said it intends to pursue a “cooperative approach” with electric car companies, with the Chancellor arguing that financial incentives are essential in persuading electric car manufacturers, such as Nissan, to build cars in the UK. The Government had no plans to cut spending, Darling announced, as cutting support “would delay a return to growth”.
Meanwhile, though, the Department of Health and the NHS announced that it would deliver savings of some £4.35 billion. I’d like to know where those cuts will be made and how they will impact. In fact, what we didn’t really hear about today from Darling was the detail on where public spending cuts will come from. Let’s face it, whoever gets elected in a few months time will no doubt have to come back with a summer Budget to announce where the real cuts will take place, and over what timescale. Prepare for a bumpy ride.