£7bn windfall for Chancellor, but ITEM Club cautions against early spring give-aways in the Budget

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London, Monday 19 March 2012: A strong rebound in corporate tax revenues and modest under-spending by government departments means that public sector net borrowing (PSNBX) is likely to undershoot its target by £7bn this year, according to the EY ITEM Club.

In a special report released today ahead of Wednesday’s Budget, the EY ITEM Club says that the government appears to be gaining more control over the public purse. PSNBX is forecast at £120bn in 2011/12, compared with the Office for Budget Responsibility’s (OBR) projection of £127bn. ITEM says that this improvement has come in spite of weak economic growth throughout the year and should be classed as structural, improving the Chancellor’s chances of achieving his fiscal targets.

Chancellor is well on track to meeting fiscal target

Full year HMRC receipts for 2011/12 should come in around £3bn ahead of forecast, largely due to corporation tax receipts which are up 6.3% on the same time last year. ITEM says this will continue throughout the course of the Parliament and should leave the Chancellor plenty of wiggle room for meeting his fiscal mandate. We estimate that his margin for error is £17bn, £7bn more than the OBR forecasts.

However, ITEM is cautioning the Chancellor against introducing any early spring give-aways in the Budget, which it says would only have a limited macroeconomic impact and could also send the wrong signals to rating agencies and the financial markets. 

Andrew Goodwin, senior economic advisor to the EY ITEM Club comments, “The Chancellor is well on track with reining in the public finances. If corporate tax receipts continue to increase at their current rate, the Chancellor might even be able to meet his fiscal mandate almost a year earlier than predicted by the OBR.

But this is no time for a spending spree

“But this is no time for a spring spending spree”, says Goodwin. “A £7bn giveaway would have a limited macroeconomic impact and would risk sending the wrong signals to the ratings agencies and financial markets. Instead we would like to see the Chancellor use his windfall as a buffer against any potential escalation of the Eurozone crisis, and invest in small, low cost measures designed to boost the UK’s productive potential.”

Budget predictions – will the rise in fuel duty be postponed?

Looking ahead to what measures the Chancellor may be storing in his briefcase this year, the recent increase in crude oil prices has made the postponement or cancellation of August’s three pence per litre increase in fuel duty an increasingly politically attractive option. Given that VAT is also levied on petrol, the actual impact on retail petrol prices would be 3.6p a litre.

Goodwin explains: “The pick-up in crude oil prices is already adding to the pressure on household incomes and businesses. However, if political tensions in the Middle East were to escalate, crude oil prices could peak at over $150 a barrel. Combined with a fuel duty increase, we could see unleaded prices at the pumps hit £1.50 a litre by the end of the year.”

Kick-starting  the UK housing market

ITEM says that targeted support for the housing market could also be a powerful tool for encouraging economic growth and employment, as it was in the 1930’s.

Goodwin explains: “Housing was one of the great beneficiaries of the low interest rates in the 1930s, taking thousands off the dole and history could repeat itself with the right support from Government.

“First time buyers are key to reviving housing demand, as greater numbers of first-time buyers allow more people to trade up, so we could see the Chancellor not just reinstate the stamp duty holiday that is due to come to an end this month, but potentially scrap it for first time buyers altogether.”

Reducing the UK’s dole queues

With UK unemployment expected to peak at almost three million by the end of the year and the potential for it to soar even higher if the Eurozone crisis deteriorates, ITEM says there is also a strong case for the Government to introduce targeted measures to support the labour market.

Goodwin said: “With the UK’s dole queues continuing to increase and the Government reliant on the private sector to drive job creation, it should be looking at reducing the cost of employing workers. Cutting the rate of employers’ National Insurance Contributions temporarily, particularly if it could be targeted at firm’s employing younger people, could be money well spent.”

Keep calm and carry on

Concluding Goodwin added: “The Government is almost two years into its austerity programme and progress to date has been reasonably encouraging. However, with oil prices continuing to soar and the Eurozone creating a climate of uncertainty, the Chancellor needs to keep calm and carry on and avoid the temptation of a major Budget giveaway.”