BBC Home
Explore the BBC
BBC News
Launch consoleBBC NEWS CHANNEL
Last Updated: Monday, 5 December 2005, 09:02 GMT
Slow growth puts finances at risk
By Steve Schifferes
BBC News economics reporter

Income Tax form
Will taxes have to rise to close the budget gap?
As Gordon Brown steps up to deliver his ninth Pre-Budget Report on Monday, he will be forced to acknowledge that the UK economy is slowing down.

The question is whether he will also accept that he is unlikely to meet his targets for the public finances.

The focus of this year's pre-budget report will be the economic forecast.

Many economists believe that the government is still being optimistic about growth, and eventually will have to scale back its spending plans.

Scaling back growth

In his Budget forecast in March, the Chancellor suggested that the UK economy would grow at between 3% and 3.5% this year and next year.

But independent forecasters surveyed by the Treasury now predict that the economy will grow by 1.8% this year, and only 2.2% next year.

Having been proved right on the economy last year, this time he will have to admit he has got it hopelessly wrong
Jonathan Loynes, Capital Economics

These gloomy forecasts are shared by leading international economic bodies, including the IMF, the OECD and the World Bank.

The employers' organisation the CBI has also joined the chorus of sceptics.

In the most recent quarter to September, the economy - measured by gross domestic product (GDP) - grew by just 0.4%, down from 0.5% in the previous three months, and at an annual rate of 1.6%.

"Having been proved right on the economy last year, this time he will have to admit he has got it hopelessly wrong," said Jonathan Loynes, chief UK economist at Capital Economics.

Mr Brown is likely to argue that exceptional circumstances - of higher oil prices and slow growth in Europe - explain much of the current slowdown, and things will bounce back next year.

But if exports do not recover, and UK consumers react to rising debt by cutting spending, then weak growth could continue for several years.

Budget black holes

The slow growth could also put a hole in the Chancellor's calculations for closing the public sector deficit.

Last year the government borrowed 39bn, and most forecasters are expecting the government's public sector net borrowing to stay at this level this financial year and next.

In contrast, the Chancellor is forecasting that total borrowing will decline to 32bn and go down to 29bn the following year.

On the government's key target figure, the surplus on the current budget, Mr Brown is expecting to have no net borrowing at all by 2006-7.

The government is hoping that rapidly rising corporate tax receipts will help ease the burden on public finances.

But although the Chancellor's coffers were boosted by strong corporate receipts in October, most experts believe there is little chance that he can achieve the near-doubling of corporate taxes that he projects over a two-year period.

This could tempt the government to consider windfall taxes on companies who are seen to have been making excess profits in areas like banking or oil.

In any case, the government is expecting that the taxes we all pay will rise by 2% of GDP (or 20bn) over the next three years, when the overall tax burden will rise to 40.6% of GDP.

But Mr Brown still believes this can be achieved without explicit tax rises.

Robert Chote of the independent Institute for Fiscal Studies believes that he could fall short by at least 1% of GDP (or 10bn) - which would need to be made up by tax increases or reduced spending.

Mr Brown is already projecting a slowdown in the rate of growth of public spending - although final decisions on the next spending round have now been postponed to the summer of 2007.

Fiddling the figures?

Even if the public finances deteriorate, Mr Brown is in little danger of missing his self-imposed fiscal rules for the current financial year.

The 'rule', introduced by Chancellor Brown, governs how much the government can borrow, and for what purpose
It means the government should borrow only to fund investment, and not day-to-day - or 'current' - spending
The policy's success is measured by whether surpluses and deficits can be balanced over a full economic cycle
The current economic cycle is expected to end in 2006

But this is largely because in July he changed the way the rule was to be interpreted.

Under the "golden rule," public spending and tax receipts have to be in balance in the long-term, over the course of an entire economic cycle - although the government is allowed to borrow for investment in projects like schools and hospitals.

In the summer, the Treasury announced that the economic cycle was now judged to have started in 1997 rather than 1999.

As these were years the public accounts were in surplus, this gave the Treasury a 13bn cushion which could balance out any deficits accrued this year.

However, the weak growth this year may lead the Treasury to suggest that the economic cycle should be extended further out - perhaps to the end of 2006.

This would make it more difficult for the Chancellor to meet his rules in this cycle, but ease the pressure for tax rises or spending cuts in the future.

Concern about such changes has led Mr Brown to announce that he will make the Office for National Statistics completely independent of the government, just as he did for the Bank of England.

But critics, including the opposition parties, would like an independent body to review the state of the public finances, as well as compliance with the golden rule.

The BBC is not responsible for the content of external internet sites


Americas Africa Europe Middle East South Asia Asia Pacific