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Brown toys with Golden Rule strictures

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In his Pre-Budget Report Chancellor Gordon Brown claimed 2004 growth would be “just as I forecast” at 3.25%, and projected the rate to be 3.0% to 3.5% next year.

“Inflation is low, unemployment is low. We’re growing faster than other European countries. The strength of our economy is matched by the decisions made in 1997 to cut national debt,” the Chancellor said

Economic Summary:
Inflation at 1.2%
Claimant unemployment 2.7%
Interest rates 4.75%
Growth rising by 3%
Living standards by 3%

However, Brown pulled something of a bait and switch in his speech, citing percentages of “national income” as his measure for meeting a new variation of the golden rule, that debt should be kept below 40% of GDP. This year the figure was 34.3% he said, with the years ahead expected to follow at 35.4%, 36.2%, 36.8%, 37.0% and 37.1%.

Previously, the golden rule held that over the course of the economic cycle, public borrowing should not exceed net public investment (NPI).

PBR Press Notice 1, ‘Opportunity for All’, sets the start of the current economic cycle in 1999-2000, and predicts an average annual surplus up to 2005-06 of 0.1% of GDP. “The Government is therefore meeting the golden rule on the basis of cautious assumptions,” it said. “There is a margin against the golden rule of £8bn in this cycle, including the Annually Managed Expenditure (AME) margin.”

The current budget returns to balance by 2006-07, and the cyclically-adjusted current budget will move into surplus by the end of the projection period, the press notice claimed.

For the Conservatives, Oliver Letwin accused the chancellor of avoiding much discussion of his Golden rule.

“ITEM Club and IFS say he has a £10bn black hole in his accounts,” said Letwin. “The tide is going out on the Chancellor’s credibility.”

Letwin cited the Organisation for Economic Co-Operation and Development’s projection of a UK growth rate closer to 2.5% for next year.

In a recent economic review, Numerica’s Maurice Fitzpatrick predicted 2004 growth to come within the Treasury’s range. The prospects for 2005 are more difficult to forecast, he wrote. Much depends on the performance of the US economy, but if growth in the last quarter of 2004 averages 0.7% to 0.8%. Brown has a chance of achieving 3% for next year.

Brown predicted a borrowing requirement of £34bn in 2004, falling to £33bn in 2005 and then to £29bn in 2006, £28bn in ’07, £24bn in ’08 and £22bn in ’09.

These figures were lower than those projected in the March 2004 Budget, which predicted public borrowing would be £37bn in the financial year 2003/04, falling to £27bn by 2007/08.

However Numerica predicted the borrowing requirement would rise to £50bn for 2007/08, while NPI would rising steadily to £31bn in 2007/08.

The reason for Numerica’s higher borrowing predictions is because the Treasury has assumed an increase in the tax take equivalent to 2p extra tax from each pound of economic activity in 2007/08 compared to 2003/04.

“We have not made a similar assumption because we believe it is unproven and subject to considerable doubt,” Fitzpatrick wrote.

He noted that over the years 1997/98 to 2002/03, the Chancellor built up a Golden Rule surplus of around £40bn. This next egg will be virtually absorbed by the ongoing deficits.

“Taxes will have to be increased in 2005/06 by c£20bn per annum (equivalent to 6p on the basic rate of income tax) in order for the Treasury’s borrowing rules to be met,” Fitzpatrick warned.

PricewaterhouseCooper’s more bearish estimates were closer to the Chancellor’s, anticipating a deficit of £36bn (3.0% of GDP) in 2004, slightly in excess of the Treasury forecast in the Budget of a £33bn deficit for 2004/05. PwC suggested Public Sector Net Borrowing would rise to around £40bn in 2005/06 rather than falling to £31bn as the Treasury had projected.

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