Even though the bounce-back in output over the summer technically ended the double-dip recession, private forecasters still expect 2012 overall to be no better than flat, against the March Budget forecast of 0.8% growth. The consensus for next year is an improvement, to about 1¼ % - but still below the official 2% projection. With Europe moribund and businesses preferring to sit on rather than spend cash, scope for a switch to export- and investment-led growth to compensate for weak consumption and public spending cuts remains limited.
Weaker growth threatens Mr Osborne’s fiscal mandate, viz to eliminate the structural current budget deficit on a (rolling) five-year horizon. But as long as the OBR sticks to its longer-term growth projections, the Chancellor could decide to defer any new austerity measures until the end of the forecast period. However, his supplementary target - for public sector net debt to be falling as a percentage of GDP in 2015-16 – is harder to square. This provides the anchor for “Plan A” and if it is overridden in the interests of supporting growth – which we think would be sensible – a replacement will be necessary to reassure the financial markets.
While the decision to remit to the Treasury some £35 billion of cash held in the Bank of England’s QE fund may cloud the issue, as long as the Chancellor intends to stick to “Plan A” any significant net giveaway is pretty much ruled out. However, there should be scope to reallocate to areas which will give the most bang per buck in terms of growth. Ideally these would include infrastructure spending and supply-side measures - but speculation at the moment centres on postponement of the fuel duty rise planned for January, paid for by changes in the tax treatment of pensions.
By Andrew Smith, Chief Economist, KPMG
