Banking on the Budget - Chancellor to Show His Hand

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Byline: GEOFFREY RUDDOCK

On Thursday 2 December the Chancellor will deliver his eighth Pre-Budget Report (PBR). Originally called 'Green Budgets,' PBRs are now an established part of the fiscal landscape.

Gordon Brown has increasingly used the PBR to take stock of the UK's economic position, give an interim report on the progress of reforms and float a few trial taxation balloons. There are generally few tax changes in the PBR. Election on the horizon - be nice to the people This year's PBR will be watched with particular interest because 2005 will see a general election so don't expect either stiff tax hikes or tax reform ideas. The latter will be in the manifesto rather than the PBR and the former will certainly not raise their heads this side of an election. So, in tax terms we are probably in for a quiet one.

However, the Chancellor spoke recently to the CBI on the second day of their conference and offered some economic words of wisdom that may offer a hint of the content of PBR and of future Treasury policy. He said the bedrock of the PBR would be, "entrepreneurialism, innovation and skills" and he urged companies to respect and work with the government's "long-term view" while rejecting knee-jerk reactions.

He said the PBR would address barriers to improved skills and innovation, describing them as, "the two drivers of modern economic success." He also said - more ominously - that 5 million US and UK jobs could be outsourced inside the next decade and that inside 20 years, half the world's exports would come from developing countries.

Economic Position The economy will almost certainly be the centrepiece of the PBR. There has been a good deal of discussion since the March Budget as to the appropriateness of the Treasury's figures. The starting point tends to be the likely GDP growth for the UK economy and this looks to come out at around 3.25 per cent in 2004, in the middle of the Treasury's forecast range. The bigger picture is that after a decade of steady economic growth, the UK economy will slow in 2005. UK manufacturing has barely grown since 1996, while the telecommunications, media and technology sectors have experienced a series of boom-bust cycles. In contrast, domestic activities like retail, hospitality and construction have enjoyed relatively strong and stable growth.

PwC's main scenario projection is that growth will slow to around 2.5 per cent in 2005 rather than the Treasury's 3-3.5 per cent forecast. Feed the GDP figures and our estimates of how tax receipts vary with GDP into the projections for Public Sector Net Borrowing (PSNB), and it looks as if borrowing could be on the rise.

Northern Ireland Closer to home, Northern Ireland will probably finish 2004 at about number five in the table of the UK's twelve regional economies. However, that growth won't be sustained into 2005, with growth of about 3 per cent in 2004 slipping back by about 0.5 per cent in 2005.

The public sector has been a key driver of growth across the UK for the past four years. That has boosted the performance of already fast-growing regions like the South-East and London and taken the bad look off the industrial

Midlands and North. But as the global economy reawakens, so to will industrial output and exports.

No such luck for Northern Ireland, where our relatively strong performance is driven by disproportionately high levels of public expenditure and public employment, backed by buoyant High Street sales. Our private sector is currently so small that even a robust global recovery won't make a lot of difference to local growth.

That means as long as public expenditure remains at current levels, Northern Ireland will continue to deliver steady growth, but if public expenditure falls back sharply, so will the Province's economic activity.

Budget deficit The PwC projection for the UK Budget deficit is around pounds 36bn (3. …