Budget tax cuts and more money in our hands to spend?

Most of us now are now feeling brave enough to believe that the cyclical recovery is well on its way. By tradition this should have the effect of reducing government borrowing assuming it maintains its momentum.  At the end of 2013, The Office for Budget Responsibility, which supplies The Chancellor with background on all his financials, projected a 2.4pc economic growth in 2014.  However, The Bank of England have now stated that they believe the figure to be 3.4pc growth for 2014.  Surely then, this will give The Chancellor some positive news to impart when he presents his budget?  After all, higher tax revenues will naturally occur from this increase in growth meaning a reduction in government borrowing and perhaps a signal from The Chancellor for a lower deficit forecast?

Will all this good news mean that the swell in government coffers is enough to see tax cuts for all of us in the near future?  Being naturally cautious, I doubt it.  Why? Well the growth, being cyclical, is a medium term improver for finances as opposed to being the provider of a longer term answer that will give a much needed reduction in the underlying deficit. So, don’t be fooled necessarily by all the good news just.  Lets’ wait and see how the economy fares once things have settled down without the cyclical upturn.

We’ve all seen the recent u turn taken by the Bank of England in February.  Originally, The Bank’s governor, Mark Carney Bank’s confirmed The Bank’s forward guidance policy last August. He said the Bank would not consider raising interest rates from their current low of 0.5% until unemployment had fallen to 7% or below. More recently he has said the policy needed to be revisited “as a result of exceptionally strong jobs growth” and would now be looking at a wider range of indicators, including productivity, wages and spare capacity within the economy. The Bank will now be basing forecasts with these indicators with a market expectation of 2% interest rates by 2017 and a first rise in spring next year.  With the quicker than envisaged reduction in unemployment the “slack” in the economy is falling. Businesses are now reporting increasing recruitment difficulties in the latest British Chambers of Commerce survey. Falling slack means The Chancellor will not be able to rely as much on strong catch-up growth in the future to eat away at the deficit and this in turn means that any major reduction in taxes is some way off yet.

So, there is no room for tax cuts, and more of the austerity is still to come. Even so, the UK budget will probably need another 5 years before it is balanced partly due to the health and pension spending increases coming in to play.

As usual with Budgets, The Chancellor will quietly take away from some areas in order to hand out to others in a blaze of glory and headlines but tax cuts will not be a headline grabber. What is interesting is that Labour could be on a sticky wicket as far as tax is concerned as they would no doubt have to confirm reasonable tax rises in order to carry out the extra spending they propose.  This may not be the best pre-election vote grabber for Labour whilst the fact that the current government is fairly neutral with regard to tax changes (up or down) may swing the vote their way next time around.

 

Author: Simon Claxton | March 19th, 2014

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Simon Claxton
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