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Emergency Budget - plenty of pain, but for how much gain?

Jeegar Kakkad June 23, 2010 09:09

While the Chancellor faced and made plenty of tough decisions in his Budget, we worry that he didn't do enough to support growth

The coalition had certainly prepared the ground for the raft of tough measures this Budget would bring forward in order to get the public finances back into the black.  But the Chancellor not only needed a deficit reduction plan that was achievable, he needed to present one which supported longer term economic growth and investment.  

You can read EEF's Budget recap, but the numbers speak for themselves on the first objective.  Last week the Office for Budget Responsibility forecast an even larger structural deficit in the public finances that previously expected.  But significant cuts to welfare budgets, a new bank levy, cuts to investment allowances and an increase in VAT were among the measures announced today to help plug the gap. 

On the spending side, the government are sticking the savage cuts to capital budgets announced by the previous government.  And while individual department spending totals won’t be revealed until the Autumn, Ministers will be spending the Summer identifying cuts of around 25% of their budgets. 

Not all the revenue raised will be used to pay down the deficit as there were some giveaways for lower income households and pensioners and the Chancellor stuck with his pre-election pledge to cut the headline rate of corporation tax, choosing to do it over time rather than in one hit. Together the measures will bring public sector net borrowing down to 2% of GDP by the end of the parliament.  It was an aggressive deficit reduction plan, but one that looks to be deliverable.   

We are less convinced that the measures will also deliver the longer-term, better balanced growth the economy needs.  The Chancellor stated that business investment and exports need to make a greater contribution to growth, but the cuts to investment allowances are at odds with this.  The headline rate of corporation tax provides only one signal that the UK is open for business.  For smaller companies investing in modern machinery after April 2012, there will be cashflow consequences from the change that will hurt their ability to reinvest in their own competitiveness.   

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Growth

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