Slow growth means delay in tax hike
Planned tax rises will have to be delayed until 2007 because of weak growth in the economy, according to an independent economic forecasting group.
The Ernst & Young Item Club said the weakness in the economy, with growth likely to fall to 2.1 per cent this year, will make it harder to plug chancellor Gordon Brown’s spending black hole.
The group, which uses the Treasury’s own model of the economy, claims the chancellor now has to deal with a £15 billion savings deficit.
A predicted interest rate cut next month could lift consumer confidence, but this would probably not have a dramatic impact until the Christmas period, the report states.
The Item Club also highlights underlying weaknesses in the UK economy. Exports have been weak, partly because of the strong pound, as has investment.
Item Club chief economist, professor Peter Spencer, said the failure of investment and exports is very worrying and has reached a “critical stage” describing their performance as “anaemic”.
“Quite simply we cannot keep propping up the UK economy by cutting interest rates, stimulating consumption and deferring personal tax increases,” he added.
The club predicted the chancellor would be able to meet his ‘golden rule’ on spending – which means he can only borrow to invest. But this was because of the decision to bring forward the start date of the economic cycle.
“With the chancellor effectively acting as judge, jury and executioner, it was always going to be hard to secure a conviction under the golden rule in this cycle,” professor Spencer said.
And he warned that the UK would start the next economic cycle with a “serious structural deficit” with no “political window of opportunity for correction”.
However, the Item Club predicts good news in the medium term, with consumer spending increasing over the Christmas period on the back of a stable housing market and the delay in the predicted tax hike.
