OBR expected to reveal double whammy of bad news for the Chancellor on Budget day

18 March 2013

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The Chancellor is facing a double whammy of bad news when he delivers his Budget speech this week. According to the EY ITEM Club, the latest economic forecast from the Office for Budget Responsibility (OBR) is likely to reveal a £8bn borrowing overshoot in 2012/13 and a further downgrade to UK growth.

The EY ITEM Club’s Budget special report says that weak income tax receipts, disappointing revenues from the sale of the 4G spectrum and the ONS’s limit on the value of QE proceeds that can be included, will force the OBR to reveal that Public Sector Net Borrowing (PSNB) has climbed to over £88bn this year – up from the £80bn forecast at the Autumn Statement

Andrew Goodwin, senior economic advisor to the EY ITEM Club comments: “Yet again borrowing is going to come in higher than forecast. The Chancellor is faced with having to backtrack on his earlier claim that borrowing will fall between 2011-12 and 2012-13 if the statistical fudges are excluded. Economically this is of little importance, but politically it will prove to be very embarrassing.”

It’s time for a ‘bold move’, says EY ITEM Club

The OBR is also expected to revise down its GDP forecast for 2013 from 1.2% to just under 1%. With the outlook so weak, the EY ITEM Club believes that the Chancellor should be bold in ‘going for growth’ on Wednesday.

Goodwin says: “The economy needs a kick start to really get the recovery moving. The markets have also shown they are open to a more measured pace of austerity than they were, even 12 months ago and the AAA rating has already been lost. Now is the ideal opportunity for the Chancellor to make a bold move.”

£10bn of infrastructure spending could boost GDP by 0.6% in 2013 and 2014

The report is calling for a £10bn package of ‘shovel ready’ infrastructure projects in each of the next two years. Although this would be financed by borrowing initially, it would largely pay for itself after three years. It says extra capital spending announced in the Autumn Statement was too small to have any significant economic impact and was a ‘missed opportunity’.

Capital spending is widely acknowledged to have the highest impact multiplier of all the fiscal tools available to the Chancellor and has the added advantage of not being included in the Government’s fiscal mandate, so a small stimulus of this type wouldn’t impact the main fiscal target. If calculations from the OBR hold true – that £1bn of capital spending boosts GDP by £1bn – a £10bn investment would add 0.5% to GDP each year.

The EY ITEM Club’s modelling suggests that borrowing would be £9bn higher in 2013-14 and £6bn higher in 2014-15. By 2015-16 borrowing would be £5bn lower than it would have been without the stimulus.

But projects need to be shovel ready

Goodwin comments: “To provide a short term economic boost, Government needs to look at projects where the planning and logistics have already been completed. It could be repairing pot holes, building roads or even maintaining schools, but they need to be up and running quickly.”

Mark Gregory, EY’s chief economist, added: “Business is looking for the Chancellor to build confidence and create conditions for investment. He needs to show that he recognises the need to support growth, make funds available and try to decrease the risk in investment.”

Housing market would also benefit from more support

As one of the biggest beneficiaries of the low interest rates of the 1930’s and a driver of the economic recovery, the EY ITEM Club says the Chancellor should also be looking at measures to support the housing market and first-time buyers.

According to the report, the Funding for Lending Scheme will help to improve the supply of mortgage funding and so focus now needs to switch to improving the level of demand, in order to enable the recovery to become more entrenched.

“We think there is a clear case for helping first time buyers,” says Goodwin. “At the bottom of the housing market chain, stimulating take up by first time buyers could literally help to get Britain moving.  An easy and relatively cheap solution might be to reinstate the stamp duty holiday for first time buyers, but it would be better to abolish it altogether for this targeted group.”

Growth may mean more borrowing

Concluding Goodwin added: “The Budget represents an important staging post for the Coalition. The recovery is still struggling to gain traction and, as we enter the second half of the Parliament, they are faced with a dilemma: stick with Plan A or try and adapt it. Over the medium term, Plan A is the right one. But there needs to be a greater emphasis on supporting growth in the short-term, even if it means borrowing a little more to make it happen.”