Chancellor Gordon Brown is banking on a global upturn in the economy and took the risk of keeping borrowing and other revenue-raising measures to a minimum in yesterday’s budget, according to KPMG.
The group’s chief economist for the UK, Andrew Smith, says that Brown is hoping that an early economic recovery will provide revenues to fill the gap in the public finances. The Chancellor’s projections are also very dependent on consumer spending levels remaining reasonably buoyant, something which is certainly not guaranteed (see
Neil Blackley Sees ‘Dire’ Decline In Media Industry).
Smith also warns that it is ‘by no means’ certain that the required global recovery will be strong enough to meet Brown’s requirements. “There is also a risk that what the Chancellor reads as a cyclical shortfall in revenues turns out to be structural. Only time will tell if he is right,” he adds.
Merrill Lynch analysts concur with this and claim that the assumptions on which the public sector finance projections are based are optimistic. “The recent slowdown in tax revenues is probably non-cyclical and so revenues may not rebound by as much as the Treasury expects even if growth picks up as they forecast,” says the broker.
