Budget 2010: 'The Cupboard is Bare', says KPMG chief economist Andrew Smith
Traditionally, pre-election Budgets contain electoral sweeteners - but this time "the cupboard is bare”. Andrew Smith, chief economist, KPMG in the UK, comments ahead of the 2010 Budget.
Instead of tax cuts and public spending increases, we can look forward to tax rises and spending cuts as the Chancellor grapples with the £180 billion hole in the public finances. Any giveaways will have to come from robbing Peter to pay Paul.
Some tax rises - such as the 50 percent rate for high earners and the rise in National Insurance contributions - have already been announced and are unlikely to be reversed, whatever the outcome of the approaching election.Others, such as the 'sin taxes' on cigarettes, alcohol and tobacco, can be increased overnight - but they aren't necessarily great revenue raisers and are instantly unpopular with some voters. A higher VAT rate, or extension of the VAT base, would raise large sums but would also have significant distributional effects.
The real debate is about how fast and aggressively the next government tackles the deficit as the economy emerges, slowly and gingerly, from recession.
The Chancellor has said he will delay the pain until 2011, arguing that reducing the budget deficit this year risks a renewed downturn. His current plan is to halve the underlying, structural, deficit by the end of the new Parliament but Mr Darling maintains that it is too early to map out specific spending cuts.
For their part, the Conservatives are calling for action on spending now. They argue that, without an early start and a detailed strategy to completely erase the deficit within five years, the markets could push up interest rates and undermine economic recovery.
Either way, most spending departments are set for substantial cuts in coming years. And with consumer spending set to remain lacklustre, the drivers for resurgent economic growth will need to come from elsewhere.
That predominantly leaves exports and business investment. However, the extent to which these sectors can spark a strong and sustained upturn remains to be seen.
Government policies, in particular when to withdraw the fiscal stimulus and how exactly to tackle the budget deficit, will be crucial in determining the future course of the economy. The markets may be impatient, but premature tightening risks killing the recovery - and making the outlook for the public finances even worse. Will the Chancellor stick to his guns?
The Budget on 24 March may provide more clues but the upcoming general election only adds to the uncertainty.
Make sure you register today for KPMG's Budget Online Briefing to find out how the Budget will impact you. Or visit our dedicated Budget website: www.kpmg.co.uk/budget.
The Chancellor of the Exchequer, Rt Hon Alistair Darling MP, presented his 2010 Budget on Wednesday 24 March.
KPMG's Budget commentary is now available for you to download from our dedicated Budget website.
If you missed our Budget online briefing, click here to listen to the recording of the event, to find out how the Budget will impact you.