The scene is set for getting straight down to business as Chancellor George Osborne is set for his first Budget.
The weeks leading up to the emergency Budget have been packed with updates from the Government with the launch of The Coalition: our programme for government, which set out the key objectives of the new Government, the Queen’s Speech affirming the key policy areas, announcements from the newly formed Office of Budget Responsibility, in addition to ongoing debate on how tax, immigration and EU policy will shape up. It is expected that the Budget will set out a plan for the next five years and possibly beyond, tackling the major issues of deficit reduction, tax policy and public sector finances.
The UK economy edged out of recession during the fourth quarter of 2009 and the first quarter of 2010, but the level of GDP is still more than 5% lower than its pre-recession peak. Most recent business surveys point to a gradual revival in activity during the first part of 2010 in both manufacturing and services, but the recovery remains fragile.
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Recent problems in the euro area and associated global financial volatility are a reminder that the fundamental issues underlying the crisis of 2008-9 have not yet been resolved, with the focus of attention shifting from excessive private sector debt to excessive public sector borrowing in many countries, potentially including the UK.
Future economic prospects Our main scenario sees UK GDP rising by around 1% in 2010, picking up to a near trend rate of around 2.5% in 2011. But there could be pitfalls along this road to recovery as the effects of past monetary and fiscal stimulus fade.
We would expect the pace of recovery in the UK economy in 2011 and beyond to be held back by the need to get public finances back under control in the medium term.
Although public sector net borrowing (PSNB) in 2009/10 will come out around £10.5 billion below the Chancellor’s £166.5 billion forecast in the Budget, this still represents a post-war high of around 11% of GDP. This annual deficit is similar to levels seen in Greece recently, although this comparison should not be over-exaggerated since in other respects, the UK public finances are less vulnerable than some other countries due to the longer maturity of our debt and the comparatively low (although rapidly rising) level of our debt stock relative to GDP.
Nonetheless, the UK clearly faces considerable challenges in restoring the public finances to a sustainable position in the medium term.
