UK Budget
March 18th, 2011
Next week the UK government will announce its budget for 2011. We know the big figures which will delineate it. They were all set out in the Red Book last summer. Current public spending will continue to grow at a much slower pace than in the last decade. Tax revenue is forecast to rise more swiftly, making some impact on the size of the deficit. Slowing spending, whilst increasing spending on the favoured areas of overseas aid, the EU budget, health and schools entails some reductions elsewhere, reductions which have been much discussed and examined in the media.
Briefing before the budget makes clear this will be billed as “a budget for jobs”. The latest jobs figures released this week show decent growth in private sector jobs, more than offsetting some job reduction in the public sector. During the recession of 2008-9 the UK lost 1 million private sector jobs, and gained more than 300,000 public sector ones. Since the recovery began, the UK has gained 400,000 private sector jobs and lost over 100,000 public sector ones. Unemployment has risen owing to the growth of the workforce, with continuing inward migration.
Press comment implies the government will announce some deregulatory measures to help business, including changes to the planning laws to accelerate building projects. They have announced the creation of new Enterprise Zones offering a mixture of as yet unspecified tax and regulatory advantages for new and growing businesses. The Chancellor may announce new tax breaks for enterprise and job creation.
Meanwhile, the arithmetic behind the budget and the recovery programme is likely to deteriorate a bit, as forecasters are now lowering their growth forecasts for the UK economy for 2011. The deficit reduction plan rests heavily on economic growth. It is above trend growth from 2012 to 2015 that delivers the large increases in tax revenue that are the reason for the deficit coming down quite quickly. Unfortunately for the government the world economy is looking less robust. The emerging economies are still tightening, to get inflation down. Euroland still has its own debt and deficit problems to address, and will do so by cutting spending and raising taxes. Western banks are still constrained from lending much by the new regulatory passion for prudence and higher capital requirements. Even the US, growing reasonably well and enjoying yet more monetary and budgetary stimulus, will find the stimulus running out next year.
The UK market is relatively cheap, and offers the shares in a number of important global resource and financial companies. Manufacturing is enjoying a revival on its modest UK base. The UK economy will make some more progress from here, but the budget is likely to encourage more media and commentarial interest on the numbers. These will reveal that there is a long way to go on the deficit reduction problem and that more tax revenue requires more rapid growth. The UK still lives under the long shadow of the Credit Crunch and the impact it had on the banks. The UK’s lead sectors in the City will encounter more headwinds from regulatory requirements, and more competition from lower tax regimes, start to make an impact on the country’s biggest single source of tax revenue and past growth.
