E&Y ITEM Club Predicts UK Tax Increases In 2007

by Jason Gorringe, Tax-News.com, London

26 July 2005

According to the Ernst & Young ITEM Club's summer forecast, the UK economy is creeping into the summer very slowly, with a revised GDP growth figure of 2.1% for 2005.

The report suggested that:

"As consumer confidence continues to be volatile ITEM predicts the Chancellor is likely to postpone personal tax hikes until 2007, leaving a question mark over how his £15bn savings deficit will be plugged - exacerbated by weak export prospects."

Addressing the Treasury select committee earlier this month, Gordon Brown told MPs that recent amendments to economic data by the Office for National Statistics suggest the current economic cycle began in 1997 - two years earlier than the date upon which the Chancellor has based his fiscal policies.

As a result, Brown believes that he has a great deal more leeway to borrow to finance public expenditure, averting the need for the Chancellor to raise taxes in order to stick to his self-imposed 'Golden Rule' - that is, borrowing only to finance new investment in public services rather than to pay for day-to-day expenditure.

According to Brown, the combined budget surplus in the additional two years of the economic cycle mean that he has a buffer of £12 to £15 billion (US$21 billion to US$27 billion) in his spending and borrowing plans.

"We would meet the Golden Rule irrespective," Brown told MPs. "I just ask you to look at the evidence. The evidence is four years of growth above 3%. Now on the surface that suggests that we did not go through a complete economic cycle," he added.

However, Professor Peter Spencer, chief economic advisor to the ITEM Club observed this week that:

"With the Chancellor effectively acting as judge, jury and executioner, it was always going to be hard to secure a conviction under the golden rule in this cycle. The present fiscal framework is very flimsy and it is not difficult for the Treasury to find the odd £10 billion, sufficient to let him off the hook in this cycle. However, the Chancellor’s big problem is that he will start the next cycle in serious structural deficit with no obvious political window of opportunity for correction.”

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