Economists Predict UK Surplus Of £16bn For This Year

Jason Gorringe, Tax-News.com, London

02 February 2001

This week the Institute for Fiscal Studies and Goldman Sachs published their annual 'green budget' review of the UK's financial position, and the possibilities open to Chancellor Gordon Brown in his March budget. The authors conclude that the Chancellor could offer new tax cuts totalling £3bn to £4bn annually by 2002-03, within existing borrowing limits, but these would have to be phased in and would mostly be bunched towards the end of the period.

The authors expect a public sector net borrowing (PSNB) surplus of £15.9bn, £5.8bn better than forecast in Gordon Brown's November Pre-Budget statement. That statement included new measures costing £2.6bn in 2001-02 and £3.9bn in 2002-03; in addition the Chancellor announced some motoring-related measures which would cost £1.7bn in 2001-02 and £2.2bn in 2002-03. It's after allowing for all this, and factoring in the Treasury's growth forecast of 2.25% (which the authors say is too low) that the Green Budget comes up with its estimate of the room for additional pre-election tax cuts.

The IFS points out that £4.5bn of this year's surplus is due to lower than planned Government spending (in its first three years the government spent less even than the Tories had planned, and it takes time to turn round the State supertanker). The Green Budget predicts that government spending will be on track next year, limiting the scope for tax cuts.

The report says that government spending over the full five year term of this parliament (if it were to be completed) would rise at 2.9% per year, compared with an equivalent 1.4% per year during the Tories' 18-year run from 1979. John Major's time in office saw an increase of 2.2% per year, so Margaret Thatcher presided over a rate scarcely above 1%.

The IFS thinks that a cut in the basic rate of income tax is unlikely, and that families with children will be the principal beneficiaries in the budget, which may include increases in the Working Families' Tax Credit and the children's tax credit, which comes into effect in April.

The planned new tax credit for research and development spending is likely to be included in the budget, although it may not take effect until 2002-03. The IFS says that the net effect of Gordon Brown's tinkering with corporate taxation has been to increase tax on company profits - the headline rate may have been reduced, but the tax base has been substantially broadened.

The full Green Budget can be downloaded (as pdf files) from the IFS site at: http://www.ifs.org.uk/gbfiles/gb2001.shtml

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