The Pre-Budget Report announced surprisingly large medium-term fiscal tightening measures but these were necessary to prevent a further upward revision to borrowing projections. The Report takes a big political risk by raising taxes on the middle classes as well as high earners, and an economic risk by delaying a cut in borrowing until 2011-12.<\/p>\n
Key points:<\/p>\n
The main surprise was the 0.5 percentage point rise in National Insurance Contribution (NIC) rates from April 2011, which will hit middle earners and raise £3.0 billion by 2012-13. A further attack on pensions tax relief brings in £500 million and a freezing of the higher-rate income tax threshold £400 million in the same year. The one-off bankers’ bonus tax was overtly political rather than fiscally meaningful – it is doubtful that the projected £550 million in 2009-10 will be achieved.<\/p>\n
The Chancellor also cut longer-term spending forecasts, with “total managed expenditure” now projected at £752 billion in 2013-14 versus £758 billion in the Budget. Savings include £3.4 billion from a one percentage point cap on pay settlements in 2011-12 and 2012-13 and £1 billion from pension reforms. The Report’s overview refers to growth in real current spending of 0.8% a year between 2011-12 and 2014-15 but this greatly underestimates the coming squeeze because it ignores plans to slash investment and a rising burden of debt interest. Detailed figures within the Report imply that total spending excluding interest will contract by a real 0.6% a year between 2010-11 and 2014-15.<\/p>\n
Despite tax increases and reduced spending, the projection for public sector net borrowing in 2013-14 is only £1 billion lower than in the Budget, at £96 billion. With little change to underlying economic assumptions, the implication is that the Budget revenue forecasts either were too optimistic or embodied an assumption of further significant tightening.<\/p>\n
The debt interest projections continue to be based on hopeful-looking interest rate assumptions. Net interest is forecast to rise from 1.9% of GDP in 2009-10 to 3.3% by 2014-15 but the latter figure implies an average interest rate on outstanding net debt of 4.3%, well below projected money GDP growth of 6.1% in the same year.<\/p>\n
The Chancellor revised his projection of the fall in GDP in 2009 to 4.75% from 3.5% but maintained growth forecasts of 1.25% and 3.5% for 2010 and 2011 respectively. Despite this year’s shortfall, the money GDP projection for 2010-11 is higher than in the Budget because of faster-than-expected inflation.<\/p>\n
By delaying deficit-cutting until 2011-12, the Chancellor is relying on the kindness of the gilt market as it takes over responsibility from the Bank of England for funding the current gargantuan shortfall. A big rise in gilt yields could yet derail his economic and fiscal strategy.<\/p>\n","protected":false},"excerpt":{"rendered":"
The Pre-Budget Report announced surprisingly large medium-term fiscal tightening measures but these were necessary to prevent a further upward revision to borrowing projections. The Report takes a big political risk by raising taxes on the middle classes as well as high earners, and an economic risk by delaying a cut in borrowing until 2011-12. Key […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3],"tags":[],"class_list":["post-2909","post","type-post","status-publish","format-standard","hentry","category-money-moves-markets"],"_links":{"self":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/2909","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=2909"}],"version-history":[{"count":1,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/2909\/revisions"}],"predecessor-version":[{"id":5218,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/2909\/revisions\/5218"}],"wp:attachment":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=2909"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=2909"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=2909"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}