Thursday January 31, 02:06 PM
UK's Darling to present maiden budget on March 12 UPDATE
(Updates to add comments)
LONDON (Thomson Financial) - The Chancellor of the Exchequer, Alistair Darling, will likely have to make embarrassing adjustments to his economic forecasts when he delivers his maiden budget at 12.30 pm on
March 12.
Analysts think Darling, who has been in the job for just over six months, will have to concede economic growth this year will be lower than anticipated and that government borrowing has been higher than planned.
Though Darling's first budget will be one of the most difficult since Labour came to power in 1997, the announcement of the date so far in advance has won him some plaudits.
Paul Davies, head of tax at Ernst & Young, said uncertainty has been stoked in recent years as taxpayers and their advisors have had to wait in limbo for an indication of when the budget will be delivered.
'Perhaps this early announcement heralds a new era in certainty and simplicity for taxpayers. It is still early days but what better way for a new Chancellor to distinguish himself?' he asked.
Though the uncertainty has been erased, Darling cannot change the backdrop in which he will deliver the budget statement.
That will likely force him to concede that his most forecasts in last October's pre-budget report were too optimistic.
Darling predicted then that UK GDP would rise by between 2.0-2.5 pct this year, which is way below the 3.1 pct recorded in 2007 and lower than the 1.8 pct average of independent forecasts compiled by the Treasury recently.
In its last Inflation Report in November (Frankfurt: A0S9N7 - news) , the Bank of England forecast that growth this year would be around 2.0 pct. However, most Bank watchers reckon that it will further downgrade its growth forecast in next month's update in the wake of the credit crunch and the sharp slowdown in global economic growth.
Partly because of this sharp slowdown in growth, analysts are very sceptical that Darling will meet the borrowing forecasts he made last October.
The figures so far show that the government is on course to record its biggest fiscal deficit since 1994/5's 43.3 bln stg.
In the fiscal year to date from April to December, public sector net borrowing stood at 43.6 bln stg, way up on the 32.3 bln recorded over the same period last year.
In October, Darling estimated the deficit this fiscal year would be 38.0 bln stg, meaning the government is already well over its target with three months of the year still to run.
To meet his forecast, the government will have to enjoy a bumper January when corporation tax payments and self-assessment receipts coincide.
Analysts polled by the Treasury itself think that it's possible but unlikely. Most think he will have to tweak up his forecast up towards the 40 bln stg mark.
Meanwhile, the current budget deficit so far this year is in deficit to the tune of 28.1 bln stg, up on the 18.4 bln recorded in the same period last year.
The current budget is used in calculating the so-called 'golden rule' of balancing the budget, excluding investment, across the economic cycle.
Last October, Darling expected the current budget deficit this year to be 8.3 bln stg.
Because the public finances are in such a parlous state, there is very little room for the Chancellor to offer sweeteners to the electorate, let alone embark on a stimulus package as announced by President George Bush last week.
'The Chancellor should be tightening policy to stay within the fiscal rules but tax increases or public spending cuts would reinforce the economic slowdown expected this year,' said Andrew Smith, chief economist at KPMG.
'Cutting taxes looks dangerous on public finance grounds but raising them carries economic risks,' he added.
Though he may opt for a neutral package, Darling may go further that his predecessor Brown, and announce some measures related to the environment and to combat climate change.
Measures that could be announced include research & development tax breaks and incentives to encourage low carbon housing.
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