Tuesday, 22 June 2010

UK Budget 2010: VAT to rise to 20% and the risk of a double dip recession

Budget 2010: VAT to rise to 20% as Osborne seeks to balance books by 2015 
"• VAT to rise by 2.5 percentage points
• Public sector pay frozen for two years
• Child benefit frozen for three years
• Income tax personal allowance to rise by pounds 1,000
• State pension relinked to earnings from April"

The UK Government is taking the punt that growth will continue despite savage cuts to government spending and an increase in the value added tax from 17.5% to 20%. The Chancellor of the Exchequer told the House of Commons last night that his "tough but fair" emergency budget would deal decisively with Britain's record £149bn deficit. The Guardian gives this summary of the budget proposals:

• Growth is forecast to be 1.2% this year taking into account today's budget measures. It is forecast to be 2.3% next year, 2.8% in 2012, 2.9% in 2013 and 2.7% in both 2014 and 2015.
• Debt will be falling and structural current deficit should be balanced by 2014.
• Consumer price inflation is expected to reach 2.7% by the end of the year returning to target in the medium term
• Unemployment rate forecast to peak at 8.1% this year and then fall for each of the next four years to reach 6.1% in 2015.
• 77% of total consolidation to be achieved through spending reductions and 23% through tax increases.
• Public sector net borrowing will be £149bn this year, £116bn next year, £89bn in 2102-13, £60bn in 2013-14, £37bn in 2014-15, falling to £20bn in 2015-16.
• Public sector net debt as share of GDP will be 62% this year and will peak at 70% in 2013-14. It will then begin to fall reaching 67% in 2015-16.
• Additional current expenditure reductions of £30bn a year by 2014-15.
• No further reductions in capital spending totals.
The danger remains that the fiscal austerity will make the growth targets unachievable. That is certainly the view of the Fathom Consulting group which warned on the eve of the Budget speech that lifting VAT could cause a Japan-style fall back into stagnation.

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