Wednesday March 12, 03:51 PM
FOCUS Darling delivers underwhelming budget amid straitened circumstances
LONDON (Thomson Financial) - Chancellor of the Exchequer Alistair Darling did what he was expected to in his maiden budget today but his downgrades of UK growth and public finances are unlikely to have gone far enough, analysts believe.
The UK, he conceded, is set for a period of slowing economic growth, rising inflation and dwindling revenues -- all of which reflect received wisdom -- highlighting the tough times that lie ahead. But for many, Darling is still opting for a best case scenario.
'Rather like a smoker pledging to give up cigarettes next year the treasury has consistently pushed back the date at which the budget deficit will close such that it is usually about a year in the future,' said Alan Clarke at BNP Paribas (Paris: FR0000131104 - news) .
'This has been the case in every budget since the public finances plunged into deficit in 2002 and the new chancellor maintains that the improvement in the public finances is just around the corner,' he added.
Darling was forced to revise up public sector borrowing figures for the coming years. For the fiscal year 2008/09 he sees borrowing at 43 bln stg, up from 36 bln stg previously. He also lifted estimates for subsequent years for 7, 4 and 2 bln stg respectively.
Meanwhile, the current budget balance is now expected to take much longer to slip back into the black. For this year, it remains in line with the forecast of an 8 bln stg deficit but next year the gap is seen widening to 10 bln stg from the previous estimate of 4 bln stg. And, the gap is not predicted to close in 2009/10 as previously expected, staying instead at a deficit 4 bln stg deficit.
In so doing, Darling has acknowledged what private economists have been saying all along -- that the scarcity of credit in the wholesale money markets will dent the overall economy by more than previously thought.
He slashed the GDP growth forecast for 2008 to 1.75-2.25 from the 2.00-2.50 pct he had estimated in the pre-budget report in October, which in turn had been revised down from 2.5-3.0 pct previously.
The downgrade brings the Treasury closer in line with the Bank of England which last month forecast GDP growth will dip to 1.75 pct the year but still on the higher side of market expectations.
For 2009, Darling sees GDP at 2.25-2.75 pct, lower than the 2.5-3.0 pct range previously. For 2010, however, he maintained the GDP growth estimate at 2.50-3.00 pct.
On the inflation front, the Treasury confirmed that it is now forecasting CPI (NYSE: CPY - news) inflation at 2.5 pct in 2008, well over the 2.0 pct target that the government has set. In the October Pre-Budget Report CPI was forecast to be in-line with the BoE's 2.0 pct target.
'The government's central growth projection of 2.0 pct this year is too optimistic. The odds are that growth will come through slower, closer to 1.5 pct, which means the government's hard pressed finances are going to hit the fiscal fan,' Bear Stearns (NYSE: BSC - news) analysts said.
But there is no denying that Darling's hands were tied.
'The global credit crisis, a slowing economy and public finances approaching their limits made for the most difficult budget backdrop since Labour came to power,' said Andrew Smith chief economist at KPMG.
'Faced with the dilemma that tax cuts would support growth but blow the fiscal rules apart, while tax increases might improve the public finances but de-rail the economy in the process, the Chancellor opted for the middle course and presented a broadly neutral budget this year,' added Smith.
In line with the straitened circumstances, giveaways were few and limited to first time house buyers and pensioners among others. There was also some muted cheer to the six month freeze in fuel duty. Sin taxes on the other hand, were hiked, to put off drinkers and smokers from their bad habits.
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