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EY Item Club report

Chancellor told now is not the time to be ‘fixing the roof’

Martin Beck EY vidAn economic forecasting group is warning the Chancellor to “stop fixing the roof” as further austerity measures would be a mistake.

George Osborne has announced that there will be further cuts, although they will be the equivalent to just 50p in every £100 the government spends. The cuts, however, will remove £4 billion from expenditure.

The Office for Budget Responsibility is expected to deliver a gloomy verdict on the state of the public finances and downgrades to UK growth on Budget day, an EY ITEM Club report says.

The OBR is likely to revise up its forecast for borrowing in 2015-16 by £4bn to £77.5bn, as a result of lagging tax revenues and a small overspend on investment. The projected budget surplus in 2019-20 is also set to be reduced from £10.1bn to around £4bn.

Weaker nominal GDP growth, lower oil and equities prices and softer earnings growth all point to the OBR having to scale back its expectations for tax revenues, says the forecasting group.

“However, this bad news will be mitigated by the prospect of lower government spending due to the impact of lower gilt yields and inflation on debt servicing costs,” it says.

Revisions to the historical data and the weak performance around the turn of the year will cause the OBR to revise down its GDP growth forecast for 2016 from 2.4% to 2.2%. However, the OBR could go as far as 2% if they conclude that the recent turbulence in financial markets has taken a toll on corporate and consumer confidence.

Martin Beck (pictured), senior economic advisor to the EY Item Club, said: “The Chancellor has spoken before about fixing the roof while the sun shines. But, with storm clouds gathering over the UK economy, tightening fiscal policy further could worsen an already fragile economic situation. Now is not the time to be fixing the roof.

“The OBR’s fiscal forecast will reduce the Chancellor’s margin for error against his fiscal mandate. The dilemma will be whether to move forward with a wafer-thin buffer, or to tighten policy to remain on track for a £10bn surplus in 2019-20.”

According to the report, the deteriorating fiscal outlook and the rumoured decision not to alter the pensions tax regime, means that the Chancellor will find himself with limited wiggle room in terms of policy announcements.

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