Expect good news for economy but few giveaways
THE UK can expect to hear good news when the Chancellor delivers his Autumn Statement speech tomorrow, with the Office for Budget Responsibility (OBR) predicted to upgrade GDP growth and cut its borrowing forecast, according to a new report from the EY ITEM Club.
After three successive quarters of strong growth, the EY ITEM Club’s Autumn Statement Preview report says that the OBR is likely to revise its GDP forecast to 1.4% for 2013 and 2.4% for 2014 – up from the 0.6% and 1.8% respectively it predicted in the March Budget.
The EY ITEM Club says that improving tax revenues will also enable the OBR to cut its borrowing forecast from £120bn to £110bn.
However, the improving economic outlook is unlikely to translate into widespread giveaways. The EY ITEM Club says the Chancellor will only have £2–3bn at his disposal to fund tax cuts or spending increases.
According to the report, tax revenues for the first half of the year have come in £8.2bn ahead of the same period last year, accelerated by a strengthening labour market, a healthier high street and the housing market revival. The largest revenue increases have come from national insurance contributions (up £3.8bn from 2012), income tax (2.7bn), VAT (1.6bn) and stamp duties (£1.3bn).
As a result, the EY ITEM Club report expects the OBR to raise its tax revenue forecasts by £10bn, which it says will have a corresponding improvement on Government borrowing. But the Chancellor’s war chest will remain light
Carl Astorri, senior economic advisor to the EY ITEM Club, said: “The recovery is picking up nicely but the improvements to the economic outlook are going to come with a caveat.
“The OBR is likely to attribute the bulk of the UK’s borrowing undershoot to cyclical factors, rather than the result of any underlying structural improvement in the public finances. This is going to leave the Chancellor with very little room for manoeuvre to fund tax or spending giveaways ahead of the 2015 election.”
Chris Sanger, global head of tax policy at EY added: “The Chancellor sees the tax system more as a tanker than a sail boat, and so his messages in the Autumn Statement are likely to be ‘steady as she goes’, rather than revealing a swift change of direction.
“As such, we can expect to hear a reiteration of the Government’s commitment to the patent box regime and the 20% corporate tax rate, which reinforce the UK’s position as a great place to do business, particularly following the recent trade delegation to China.
“Any tax tinkering is likely to involve the introduction of tightly focused, targeted tax incentives focused on employment and training – both of which are consistent with the Government’s focus on job creation and growth. And the Chancellor may also attempt to smooth out some of the discrepancies in the personal tax system.
“Finally, although it’s perhaps a long shot, the Government may look at increasing tax incentives for companies investing in capital infrastructure to encourage businesses to start spending.”
