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EY ITEM Club Autumn Statement Preview December 2013

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Highlights from the EY ITEM Club Autumn Statement preview

  • The OBR’s growth forecasts look set to be upgraded. Growth in each of the first three quarters of 2013 has come in markedly stronger that the OBR was expecting at the time of the Budget. Consequently, the OBR will almost certainly revise its forecasts up so that they are closer to our own figures of 1.4% for 2013 and 2.4% for 2014.
  • Tax revenues in the first half of the 2013-14 have come in well ahead of the same period last year. This will allow the OBR to cut its borrowing forecasts with this fiscal year’s borrowing number dropping closer to our own forecast of £110b which is £10b lower than the OBR’s current estimate.
  • With the OBR likely to judge that much of the improvement in borrowing is cyclical rather than structural the Chancellor has only £2-3b of fiscal wriggle room to fund tax cuts or spending increases ahead of the 2015 general election. This will be used to deliver on policy pledges made during the party conference season and to boost household cashflow.
  • The Chancellor will almost certainly use some of the extra cash he has available to fund the Liberal Democrats’ £600m promise to give free school meals to children aged under eight and the Tories’ own £600m plan to give married couples a £1,000 transferable tax allowance from 2015. One way that the chancellor will boost household cashflow is by introducing measures to reduce energy bills, which have increased 160% since 2000. Bills will be reduced by shifting the cost of government-backed insulation schemes away from bills to general taxation. Doing this will reduce household energy prices by around £50 a year but at a cost of over £1.0b a year.
  • Additional revenue could be raised from the top end of the London property market. The Chancellor could impose capital gains tax on foreign owners of British property. Another option would be for Mr Osborne to increase again the rate of stamp duty charged on the purchase of homes worth more than £2m.
  • There remains a strong case for using infrastructure spending to boost the UK’s potential growth rate. The UK’s potential growth rate, which governs how quickly the economy can grow in the long-run without generating domestic inflationary pressure, has dropped from an average of 3% in the ten years preceding the 2008/09 recession to closer to 2%. One way that the government could help to boost potential growth again would be to both increase infrastructure spending and do all that it can to encourage private sector businesses to invest more to increase productivity and the capital stock.