Budget 2010: Everyone Will Be Worse Off, says KPMG
KPMG Chief Economist Andrew Smith says that after the biggest squeeze since the 1970s, everyone will be worse off - and there are doubts over the long term growth rates forecast by the Chancellor. Key now, is where the spending axe will fall.
Government finances
It's Groundhog Day (again). The Chancellor stuck to his plan to halve the deficit by 2013-14 with a combination of tax rises and spending cuts starting in earnest next year - unchanged from December's PBR and last year's Budget. But familiarity should not breed contempt. This would still be the biggest squeeze since the 1970s. And it still leaves the other half for the Parliament after next.
The undershoot in borrowing in the last few months has been carried forward, allowing Mr Darling to incorporate a steeper decline in the deficit in his projections. But is he counting his chickens? The deficit is the difference between two large numbers and even small percentage errors in forecast revenue or spending can translate into big errors in forecast borrowing. The average error for forecasts only one year ahead is over 1% of GDP, or £17 billion.
We still do not know where the spending axe will fall but this only served to highlight the difficulty of significantly cutting public spending when the biggest budgets are sacrosanct. Protecting health and schools implies cuts in other departments of at least 10% and up to 20% on a worst case basis by 2013-14.
The Economy
While the focus of deficit reduction is on spending cuts and tax rises, it is also crucially dependent on a return to robust GDP growth with 3 to 3 ½ % projected not only next year but every year out to 2014. With the public sector cutting back, the private sector trying to repair its balance sheet and interest rates already at rock bottom, the best hope is an export-led revival - the devaluation of sterling can only help but, worryingly, our main overseas markets are in a similar position.
Is such strong growth sustainable anyway? There are fears that the damage to productive potential from the crisis may limit headroom for a catch-up period and, worse, that the long-term sustainable growth rate may have been reduced from the officially assumed 2 ¾ %.
The bottom line is that the crisis is thought to have permanently shrunk the economy by 5%. On average we will all be correspondingly worse off - the question is how the pain will be distributed.
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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.
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