Commenting following the 2011 Budget, it said: “Despite the downward revisions, we think the Office for Budget Responsibility's (OBR) forecast for economic growth (1.7% in 2011 and 2.5% in 2012) remains too optimistic.
“We expect a more subdued recovery (GDP growth of 1.5% in 2011 and 1.8% in 2012) due in large part to very weak consumer spending growth. Such poor consumer spending growth is expected because of declining real incomes this year and a weak housing market both this year and next.
“Partly underlying the OBR's robust forecast for consumer spending is the path for household saving. They expect the household saving ratio to stabilise at around 3.4% of incomes over the next five years. In contrast we expect the saving ratio to be double this by 2015, as the retrenchment of household finances continues.
“The Budget decisions are broadly fiscally neutral and will have little effect on the aggregate economic numbers. Indeed by 2015-16 the net policy effect is dwarfed by the upward revision to spending on benefits and debt interest payments. If the Chancellor wanted to stimulate economic growth this year then a temporary targeted tax cut would have been a more appropriate policy decision.
“The headline grabbing reduction in fuel duty is expected to be paid for by an increase in the tax paid by oil and gas companies operating in the North Sea. While other giveaways rely to some extent on further clampdowns on tax avoidance and evasion (expected to raise £1.2 billion by 2015-16). We should not rely on the success of such clampdowns as there is no guarantee the projected revenues will materialise.
“The overall current budget balance is now expected to be in deficit in 2015-16, rather than in surplus as projected in the OBR's November Outlook. According to the OBR this downward revision is almost entirely due to cyclical factors. The cyclically adjusted budget balance (the Fiscal Mandate's primary target) is still expected to be in surplus in 2015-16.
“Our latest forecast suggests this primary target will be just missed (by 1% of GDP) and that additional tax increases will be required at some point over the next five years.”
