Wednesday March 12, 02:57 PM
UK BUDGET Darling lowers growth forecasts again UPDATE
(Adds details on classification of Northern Rock (LSE: GB0001452795.L - news) )
LONDON (Thomson Financial)
- Chancellor of the Exchequer Alistair Darling today sought to prepare the country for tough economic times ahead by lowering the expected rate of GDP growth for the second time since October while conceding that inflationary pressures are rising at the same time.
In his maiden budget speech here today, Darling 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.
Darling slashed the GDP growth forecast for 2008 to 1.75-2.25 pct from the 2.00-2.50 pct he had stated 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 this year.
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, Darling said he sees prices rising over the short term before settling at the 2 pct target by 2009. In official Budget documents, the Treasury said it is now forecasting CPI (NYSE: CPY - news) inflation during 2008 to be 2.5 pct, reflecting the 'significant increases in global agricultural commodity and energy prices'.
In the October Pre-Budget Report, CPI was forecast to be in-line with the BoE's 2.0 pct target.
However, the Treasury said that CPI should fall back to target in 2009 and remain around that level thereafter.
Darling's forecasts on the fiscal front also came under pressure, reflecting tough global conditions.
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. For 2009/10 he sees it at 38 bln stg from 31 bln stg, for 2010/11 at 32 bln stg from 28 bln stg and for 2011/12 at 27 bln stg from 25 bln stg.
Still, Darling maintained that fiscal policy will be able to provide real support to the economy this year, even as it stays within the disciplines of the government's fiscal rules.
For the current fiscal year to April 2008, he said public sector net borrowing will be at 36 bln stg, some 1.4 bln stg lower than forecast in October.
Meanwhile, the current budget balance this year remains in line with the forecast of an 8 bln stg deficit even taking into account the turbulence in financial markets. Next year the deficit is seen widening to 10 bln stg from the previous estimate of 4 bln stg and in 2009/10 at a shortfall of 4 bln stg from the previous estimate of a 3 bln stg surplus. Further out, Darling sees surpluses emerging -- a surplus of 4 bln stg in 2010, 11 bln stg in 2011 and 18 bln stg by 2012/3.
Crucially, these new figures still meet the Golden Rule over the economic cycle.
He stressed too that the government will borrow only to invest. He sees public sector net investment rising from 33 bln stg next year to 37 bln stg in 2010 - the highest in three decades.
'Borrowing for investment within the fiscal rules, means that we will meet our second fiscal rule,' he said, adding that debt levels are forecast to be 38.5 pct, 39.4 pct, 39.8 pct, 39.7 pct and 39.3 pct of GDP by 2012/13.
The Treasury said that these figures will exclude the impact of Northern Rock on the public finances.
'In line with the Code for Fiscal Stability, while Northern Rock remains in the public sector the Government will measure performance against the sustainable investment rule using figures excluding its impact,' the Treasury said in the official Budget report.
Darling said public spending in the coming three years will grow by 2.2 pct and by a rate of 1.9 pct after 2011. The latter, he said, 'will allow departmental resources to continue to grow at broadly the same rate as in the next three years.'
Additionally, he said the government expects to spend over 2 bln stg more supporting UK troops on the front line.
Turning to the environment, Darling said the planned 2p increase in fuel duty will be delayed until October 'to support the economy now and help business and families.'
Still, he noted that he will increase fuel duty by 0.5p per litre in real terms from 2010.
On the thorny issue of non-domiciled individuals, Darling said his plans for a blanket levy of 30,000 stg after 7 years in the UK is here to stay.
'This new charge will be implemented from April. There will be no further changes to this regime for the rest of this Parliament or the next,' he said.
To help key workers get on the property ladder, Darling said he will extend access to new-shared equity schemes.
'Until now these were only available to those who could afford three quarters of the price of their new home. I am now extending the scheme to help those able to afford half of the price of their new home,' he added.
Additionally, he said stamp duty on shared ownership homes will not be required until buyers own 80 pct of the equity in their home.
Darling also said he plans to slap a charge on carrier bags.'We will introduce legislation to impose a charge on them if we have not seen sufficient progress on a voluntary basis,' he said.
Legislation would come into force in 2009 and the money raised should go to environmental charities.
Darling also proposed a major reform to Vehicle Excise Duty to encourage manufacturers to produce cleaner cars and by introducing new bands. From April 2010, there will be a new first-year rate based on carbon dioxide emissions. Cars that emit less than the proposed 130 grams per kilometre European standard of carbon dioxide emissions will pay no car tax at all in the first year. But a higher first year rate will be introduced on the most polluting cars.
Sin taxes meanwhile, are going up. From 6.00 pm today the duty on tobacco will rise, adding 11 pence to the price of a packet of 20 cigarettes and 4 pence to the price of five cigars.
On alcohol too, taxes will rise. From midnight on Sunday, alcohol duty rates will increase by 6 pct above the rate of inflation. Beer will rise by 4p a pint, cider by 3p a litre, wine by 14p a bottle and spirits by 55p a bottle.
Alcohol duties will increase by 2 pct above the rate of inflation in each of the next four years, Darling added.
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