He said: “This Budget was promoted as a pro-growth Budget which is disingenuous if not misleading as it is taking place against one of the biggest fiscal squeezes in economic history with the economy slowing fast. Indeed, the Chancellor demonstrated in his speech today that, despite the weakening economy and higher than expected inflation, the Coalition government is going to remain true to its principles of reducing the size of the deficit and public sector debt.
“The headlines for the Budget will concentrate on the delay in the 4p reduction in fuel duty and an unexpected further cut in 1p in fuel duty that will reduce petrol prices at the pump for the beleaguered consumer. This will cost £2bn and be paid for by an increased tax on oil companies. Another populist measure was the accelerated reduction in corporation tax of 2p to 26% that will be financed by an increased levy on banks. However, the essence of the Budget is how the Chancellor was able to maintain his forecasts for reducing the deficit in the face of deteriorating growth and some minor giveaways.
“There had been some speculation that the Chancellor might moderate his fiscal plans in recognition of the fragile state of the economy but this has not been the case. Included in the Budget were revised forecasts made by the Office of Budget Responsibility. These were last updated in November and subsequently have been overtaken by events, including negative GDP growth of -0.6% for the final quarter of last year. Although this was partly weather related, last week the OECD downgraded forecast GDP growth to 1.5% for 2011. In the Budget today the Chancellor recognised reality and announced new forecasts from the OBR that reduced expected growth to 1.7% from 2.1% for this year. Furthermore, the forecast for 2012 has been cut from 2.6% to 2.5%.
“The Budget is fiscally neutral and the deficit is forecast to remain at £146bn for 2011, albeit a reduction of around £12bn from the June Budget. By 2015/16 the deficit is forecast to fall to just £29bn. This reveals the size of the challenge facing the government. Although the Budget has provided some small incentives to lower income households, the spending cuts announced last year are only just taking effect and already the economy has slowed rapidly. Furthermore, inflation is rising and the Chancellor declared today that it is likely to remain between 4-5% for the rest of this year that will put pressure on the Bank of England to raise interest rates in the near future. Unemployment is also high and rising and so, overall, the average household is suffering a significant decline in real income.
“As we have seen with the peripheral countries in Europe that have high deficits combined with strict austerity programmes, it can easily lead to a downward spiral of falling growth and rising debt despite the spending cuts because tax receipts and other revenues fall more. The Chancellor should be able to avoid this debt trap because the UK has the advantage over the Eurozone of an independent monetary policy and floating exchange rate but he is walking a precarious tightrope. If economic growth does falter more than expected it is important that the coalition government has a Plan B that it can implement.”
