Grim economy may force government to skip personal tax hikes |
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Tue, 26 Jul 2005 04:35
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LONDON: Britain's worsening economic situation may tie the hands of chancellor of the exchequer Gordon Brown in effecting any income tax rate hikes until 2007.
Management and financial consulting company Ernst & Young's Item Club, a respected analysts' group, says an expected fall of 1.1 per cent in manufacturing output, a slower GDP growth at 2.1 per cent and a shattering consumer confidence, all indicative of weaker outlook for the economy, will force Brown not bring in any increases in the personal tax rates. Item Club uses the Treasury's own economic forecasting models.
Prof Peter Spencer, chief economic adviser of the Item Club, said Gordon is "not going to be the master of the events, he is going to be their slave".
Brown had promised way back in 1977 when the Labour came to power to balance the budget on day-to-day spending when averaged out over the economic cycle. He had to shift the economic cycle to 1997 from 1998 in order to make use of 12 billion pounds available in surplus to offset the deficit, so that he could appear to be not violating the "golden rules" he had set for maintaining fiscal health. This has enraged economists, who alleged that he has been manipulating fiscal rules.
Spencer said the country's economy was structurally unbalanced and heavily reliant on consumer spending, which had slowed. The economic slowdown will result in 18-billion-pound shortfall in the public finances in the next two years.
The economy cannot always be popped up by cutting down interest rates, stimulating consumption and deferring personal tax increases, he said, though better consumer spending, no doubt, may result in some amount of recovery.
A strong pound, which resulted in higher prices for British goods abroad, and weak investment have led to this "anaemic performance" over the past 18 months, says the Club.
Corroborating the report is the data published by the Office for National Statistics recently that gross domestic product grew by only 0.4 per cent between April and June.
Economists feel that tax rate hikes are needed as the current deficit is structural and not just cyclical.
The Club feels an interest rate cut is appropriate and it expects a decision to this effect in August.
All these hard facts notwithstanding, Spencer is optimistic. He says consumer confidence appears to be strong as indicated by the revival signs in the housing market. The economy, in such circumstances, should be coming back to the normal next year.
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