Looking ahead to next week’s budget, Andrew Smith, Chief Economist at KPMG in the UK, said:
“Halfway through the current Parliament, the government’s strategy of combining austerity with recovery is having at best mixed results. The economy has been pretty much flat, the budget deficit has not fallen nearly as quickly as originally envisaged and the last few years have been characterised by downward revisions to growth and upward revisions to public borrowing.
“Having delivered the latest dose of bad news as recently as December’s Autumn Statement – a further delayed and weaker recovery, more austerity measures in the next Parliament and the probable overshoot of the debt target - the Chancellor should be able to avoid announcing further significant downgrades in the Budget on March 20.
“However, good news will be in equally short supply. There has been a hesitant start to the year but even if the economic forecast stands, growth around 1% this year and 2% next is still weak by historical standards. Meanwhile, on a like-for-like basis public borrowing for 2012/13 looks likely to exceed December’s forecast, albeit marginally, rather than coming in lower than last year as promised.
“So the government’s self-imposed deficit reduction straitjacket – in the Prime Minister’s words “this month’s Budget will be about sticking to the course” – leaves little room for manoeuvre. Within its constraints there may be some scope to get more bang per buck in order to stimulate some much needed demand, for example with increased government investment financed by savings elsewhere. There are also likely to be more low-cost measures such as abolition of red tape and to improve labour market flexibility. But a significant net fiscal boost along the lines of the Business Secretary’s “Plan A-plus” (a new programme of infrastructure spending financed by extra borrowing) would be ruled out, within that framework.
“If “fiscal conservatism” remains the order of the day, what about the “monetary activism” which is meant to accompany it? Speculation is mounting that, ahead of the arrival of the new Bank of England Governor in July, the Chancellor may change the Monetary Policy Committee’s remit. The aim would be to allow a looser monetary policy aimed at boosting growth – but isn’t that what the MPC has been pursuing anyway?”
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