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Growth forecast likely to rise

‘Double Budget boost’ for Chancellor on economy

Chancellor Philip Hammond is expected to receive some positive news on Budget day with lower borrowing projections and stronger growth in the economy.

Higher than expected tax receipts will help reduce the Office for Budget Responsibility’s borrowing forecast for the current fiscal year by £3 billion to £65bn, says the EY Item Club.

Momentum in the UK economy should enable the OBR to raise its GDP forecast for this year from 1.4% to 1.6%, or 1.7%.

However, the Item Club says that the OBR is unlikely to make any substantial changes to its forecast further out, suggesting that any effects of Brexit on GDP growth are likely to develop outside its 2021 forecast horizon.

Martin Beck, senior economic adviser to the Club, says: “The OBR will paint a marginally better picture of the UK economy and public finances in the short term, but fiscal policy faces major challenges on both the revenue and spending sides in the longer term.

“However, the continued robustness of the economy and lower-than-expected public sector borrowing mean that there is little pressure on the Chancellor to use fiscal levers to support activity or fill any fiscal ‘black hole’. 

“One of the most interesting aspects will be how the OBR deals with the latest Brexit developments.

“We suspect there will be few changes given that lingering questions around the UK’s post-Brexit trade relations with the EU and migration policy are likely to go unanswered for some time yet.”

Expected announcements

Item expects the Government to make further steps towards achieving the Conservative party’s manifesto commitment to raise the tax-free personal allowance to £12,500 and the threshold for the 40% rate of income tax to £50,000 by the end of the current Parliament.

A personal allowance increase to £11,800 and a rise to £46,500 for the 40% threshold to kick in would keep this commitment on track, the report says.

With the Government likely to want to head off concerns around a ‘cost of living crisis’, a temporary cut in fuel duty could be a relatively inexpensive yet popular move. The Chancellor may also look to repeat the decision made in 2011 to defer the standard inflation driven increase in Air Passenger Duty (APD) for one year.

The EY ITEM Club Budget preview says both measures would offer some support to consumers against higher inflation stemming from the pound’s weakness.

Jason Lester, EY’s managing partner for tax, says: “Despite the Chancellor’s assertion that ‘Budgets should be boring’ it’s hard to believe that this will be an event completely devoid of policy measures.

“The Government will be acutely aware of the need to offset the squeeze on household incomes caused by higher inflation and although we may not get fireworks until the autumn, we should at least be warmed up by a few sparklers.”

 

 

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