UK is least bad despite Darling’s scary forecasts, says economist

A TOP economist has described Alistair Darling’s Budget forecasts as “pretty scary” but said the UK economy is currently in the “least bad” position compared to its global competitors.

Catherine Macleod, global macro economist at BDO Stoy Hayward Investment Management, said there was no surprise that yesterday’s Budget was “rather boring”.

“With public sector net borrowing forecast to reach £175bn this year, and with relatively pessimistic estimates for the total debt to GDP ratio through to 2013-2014 to nearly 80% the numbers look pretty scary, no doubt about it.

“It is typical during Budget time in a downturn to lambaste the Chancellor and bemoan the state of the economy. Darling will no doubt be pilloried for being overly optimistic in his projections – the most spectacular of which seem to be the £35bn ‘efficiency savings’ that he hopes to find.

“There certainly are a lot of negatives for the UK economy at the moment besides the sharp increase in Government debt.

“That said, we can’t help but feel that the gloom and doom being apportioned to the UK is somewhat out of kilter with the problems faced elsewhere through the developed world. Perhaps it is time to take a step back and realise that the UK is in many senses the canary in the cage. Being a small, open economy with flexible labour markets and high competition in goods and services, it would be expected that bad news filters through relatively quickly into the UK economy.

“The OECD forecasts for UK growth over the next two years put it well behind the US, Europe and the OECD average, with Japan being only marginally worse. Considering that the banking crisis is live and kicking in both Europe and the US, and that we have seen an annualised 36% drop in Japanese production, this seems a bit extreme,” she said

“It is not all peaches and cream. We are facing a tough few years ahead for the UK economy as the imbalances built up over the last few years are addressed, and taxes mount into the future, whilst the investment landscape becomes increasingly influenced by the incentives that government is putting in place to direct activity in areas they believe are desirable such as renewable energy and green technology.

“When it comes to choosing the best out of a bunch of ugly sisters, the UK economy is beginning to look least bad – the chancellor’s Budget notwithstanding,” added Ms Macleod.

Meanwhile, her colleague Terry Jones, tax partner based at BDO Stoy Hayward in Leeds, said:  “No one will be surprised that the Chancellor has not come up with any magic solutions to the UK’s substantial fiscal deficit. There will be pain on both the public spending side and the tax side to reduce this to below £100bn by 2012-13.

“It was already evident following last years Budget that higher income groups were going to be expected to suffer significant tax hikes in the next few years. We now know the extent and methods which will be applied. Once the ‘totem’ of the cross party agreement on a 40% top rate of income tax had been broken by last year’s PBR to increase this to 45%, no one will be surprised that even before that increased rate has come into force.

“This alone is a substantial tax increase which will not only affect the stereotypical investment banker but will apply to the top earning doctors, head teachers, judges and many managerial and professional executives. From 2011-12 these people face a halving of the relief they obtain for personal pension contributions and many will look even more enviously at the pension rights of public sector employees, Government ministers and MPs,” added Mr Jones.