“Budget for Growth” Forecasts Lower Growth
GBGC’ Economic Analysts assess the 2011 Budget
The 2011 Budget delivered by Chancellor George Osborne on 23 March 2011 contained three important items:
i) lower growth and higher inflation than forecast;
ii) growth measures for businesses of which a 2% cut in corporation tax is the most prominent;
iii) making oil companies fund a cut in fuel duty.
The most conspicuous piece of bad news is the downward revision of GDP growth for 2011, 2012 and 2013. The heftiest revision is for 2011, where GDP growth was downgraded from 2.1% to 1.7% (2012 revised down from 2.6% to 2.5%).
From 2013 to 2015 growth was actually revised upwards. Lower growth forecasts translate into a GB£47 billion higher public sector borrowing over the next five years and means that the Chancellor’ task in reducing public debt is getting even more difficult (if that were possible).
On a brighter note the Chancellor announced that unemployment will peak this year and start decreasing in 2012. But if this forecast does not materialize he will have to go back to the drawing board to revise his borrowing needs. Alternatively he could find areas for further cuts or increase taxation, neither of which is economically or politically attractive.
Persistently high inflation is the real risk to the Chancellor’ future plans. The Office for Budget Responsibility is forecasting CPI will remain between 4% and 5% – on a 2% target.
If the Bank of England feels the need to raise interest rates the government’ policy objectives will go from “daunting” to “quasi-impossible”. Higher interest rates would increase the cost of servicing public debt, families will be further squeezed leading household consumption to nose dive, taking GDP growth with it, and unemployment would go on increasing along with associated welfare costs.
Much of the Chancellor’ speech was spent talking about tax and business reforms to encourage growth. He announced a 2% cut in corporation tax (instead of 1% previously announced) giving the UK the lowest rate in the G7 at 23%.
Other pro-business announcements include the creation of 21 new “enterprise zones” in needy areas where enterprises will be offered a holiday on business rates, reduced planning restrictions, small companies’ research, development tax credit to rise to 200% in 2011 and 225% in 2012, and higher capital allowance for manufacturing companies. It remains to be seen if these measures will be sufficient to re-balance the economy from the financial sector to industry as the government claims.
The Chancellor is attempting to breathe life into the housing market – an obsession of UK consumers and how confident they feel – by earmarking GB£250 million to help first time buyers. It is not expected to alter the market trend, although it will help 10,000 families.
On taxation the Chancellor announced a proposal to merge income tax and national insurance. This will make it difficult for future Chancellors to increase personal taxes by stealth. From April 2012 personal tax allowance bands will rise by the rate of CPI.
Some revenue raising measures included the closure of tax loopholes which are expected to raise GB£1 billion a year, three forms of land tax evasion to be closed down, and an increase of charge on non-domiciled taxpayers.
For the gambling industry the 2011 Budget contained a few pieces of direct news – which is often a good thing. The only changes are that gaming duty bands and amusement machine licence duty rates will be increased in line with the RPI. The Chancellor has also confirmed that the government’ intention to reform the taxation of gaming machines and the introduction of a Machine Games Duty (MGD). Consultation on the MGD will take place in May 2011 with a plan to implement it in early 2013. There will also be no changes to National Lottery duty (12% of gross stakes).
But the gambling sector relies on consumer confidence and their disposable income for its revenues. All involved will be hoping the Chancellor has read the runes correctly and that he’ placed our money on a winner.