Budget 2014: more growth but serious fiscal challenges lie ahead
In this perspective Ruth Lea, economic adviser to the Arbuthnot Banking Group, discusses the Budget.
The main points are:
– The OBR upgraded the GDP growth forecasts for 2014 (to 2.7%) and 2015 (to 2.3%), as expected.
– Partly reflecting the better growth, there was some improvement in the public finances, but the fiscal outlook still looks poor. The OBR forecasts zero public borrowing in FY2018, but this is dependent on deep spending cuts to come, which may or may not be delivered.
– The Budget’s main policies were the increase in personal allowances to £10,500; more help for savers; revolutionary changes to DC pensions, removing the requirement to buy an annuity; help for business (a doubling in investment allowances and cuts in energy bills); cuts/freezes in alcohol duties; details on the Welfare Cap; and further measures to tackle tax avoidance.
– The Budget was, technically, at face value, neutral. And therefore something of a fiscal non-event.
– But IFS analysis suggested that the permanent (and sizeable) tax cuts were only partly funded by permanent tax increases. The rest was funded by “temporary” revenue raisers (which could carry a permanent cost to the public finances) and unspecified spending cuts well into the medium-term. The IFS implied that the Chancellor was risking weakening the longer-term public finances.
– If the pencilled in spending cuts to FY2018 are implemented, then the implications for departmental spending are serious. The IFS estimates a total departmental spending cut of 19.8% between FY 2010 and FY2018, of which 8.9% will have been met by end-FY2014, leaving 11.9% to come. If the NHS, schools and overseas aid remain “protected”, the “non-protected” departments could face a total cut of over a third between FY2010 and FY2018.
Ruth said: “Despite the better economic prospects, the public finances remain dire. Even though the Budget seemed to be neutral, the Chancellor may be risking the longer-term health of the public finances by part-funding permanent tax cuts by temporary revenue raisers and unspecified spending cuts which may not be delivered. The fiscal challenges facing this country remain formidable.”