Upwardly Mobile? in His Budget Speech, the Chancellor Remained Optimistic about Britain's Prospects. David Ross Compares Gordon's Brown's Analysis with Independent Forecasts and Reviews the Global Situation. (Economics)
Ross, David, Financial Management (UK)
Chancellor Gordon Brown's seventh budget speech was less than enthralling. It painted a picture of a UK economy characterised by stability on inflation, public debt and unemployment. As in his pre-budget report in November, Brown blamed the slowdown in the world economy for throwing his economic forecasts off track.
The chancellor revised his growth forecast for 2003 downward by 0.5 per cent, to 2.0-2.5 per cent, but left the forecast for 2004 unchanged at 3.0-3.5 per cent. Growth is also forecast at 3.0-3.5 per cent for 2005. This follows GDP growth of 1.8 per cent last year (see graph). The forecasts, especially the one for 2004, are above the current consensus of independent forecasts. The manufacturing sector is forecast to emerge from recession this year with growth of 0.25-0.75 per cent, picking up to 2.25-2.75 per cent next year on the back of improving world trade and the benefits from a weaker sterling.
As with any forecast, there are upside and downside risks. The chancellor is relying on the world economy to recover faster than others expect and trusting that UK household consumption will slow only modestly during the forecast period. With higher employer and employee national insurance contributions having started on 6 April, frozen personal tax allowances and double-digit increases in council tax, Brown is being unusually optimistic. Perhaps to help keep inflation in check, the chancellor deferred the increase in fuel duty for six months.
The chancellor concentrated his budget measures on improving flexibility, productivity and investment. He focused particularly on small and medium-sized enterprises (SMEs). He announced that:
* the R&D tax credit scheme will be extended, and cut the minimum expenditure threshold to 10,000 [pounds sterling];
* the qualifying threshold for capital allowances for SMEs to become eligible for the 40 per cent investment allowance will rise to the European maximum of 20 million [pounds sterling];
* three new tax reliefs and incentives for SMEs will be introduced and fines for late payments of VAT will be abolished for some small businesses;
* work permits for skilled migrants will be expanded. …