Andrew Smith, Chief Economist at KPMG in the UK looks ahead to the Budget on 19 March:
“The Government’s original strategy was to combine economic recovery with repair of the public finances within the current five-year parliament. The good news is that we are finally getting the recovery; the bad news is that we are only halfway through what has now become a decade-long deficit reduction programme, severely limiting the Chancellor’s room for manoeuvre in this year’s Budget."
“Happily, last year’s Budget forecast of only 0.6% growth in 2013 proved much too pessimistic as the economy gained momentum, taking growth over the year as a whole close to 2%. For this year, even the Office for Budget Responsibility’s most recent December forecast of 2.4% is looking conservative, with the Bank of England, for example, now projecting over 3% - but either way the pre-crisis output peak is at last in sight!"
“Concern that the recovery is unbalanced and that the UK is embarking on another unsustainable consumer-led growth path is probably overdone as, with household spending accounting for some two-thirds of total demand, it was pretty much inevitable it would have to do much of the heavy lifting in the early stages of recovery. There are some signs that the recovery is now broadening, but it would make sense for Mr Osborne to do what he can to encourage exports and investment."
“In contrast to the brightening economic outlook, there is still a long way to go before the public finances are back in balance. Partly as a result of disappointing growth in 2010-2012, the budget deficit has failed to close as initially hoped and, quite sensibly, the Chancellor has postponed additional corrective measures until the next parliament. But with growth now surprising on the upside, could the deficit also narrow more quickly than expected?"
“Much depends on the amount of unused productive capacity available, which will determine how far and fast output – and hence government revenues - can sustainably grow. The bigger this “output gap”, the more scope there is for the deficit to shrink automatically as the economy recovers; but the smaller it is, the more the need to correct the deficit with higher taxes or larger spending cuts."
“Unfortunately, no-one really knows how much headroom there is. As the cost of being wrong could be large – too pessimistic an assessment would result in more austerity measures and an unnecessary loss of output - we are unlikely to see Mr Osborne tightening the fiscal stance further. But equally there is little scope to loosen policy either and any ‘giveaways’ on taxes are likely to be balanced with ‘takeaways’ on spending.”
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Margot Cowhig, KPMG Corporate Communications
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KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and operates from 22 offices across the UK with approximately 11,500 partners and staff. The UK firm recorded a turnover of £1.8 billion in the year ended September 2013. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. It operates in 155 countries and has 155,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.