KPMG says pre-Budget report will be positive

Accountants KPMG predict an upbeat statement from the chancellor in December for this year’s pre-Budget Report.

Andrew Smith, chief economist KPMG, says: “It’s the vision thing. This year’s Pre Budget Report – almost certainly Gordon Brown’s last – is billed as being more about the long-term than the short-term.

“For the moment, the economy is ticking over and the public finances have at least stabilised – suggesting little net change in taxation is required in the immediate future – leaving Brown to concentrate on broader issues.

“The main themes will be enhancing economic flexibility – everything from
skills to planning to transport infrastructure – security, and, of course, the environment.

“With the Stern review under his belt, the chancellor is expected to set out a menu of green tax options, although the introduction of some specific measures cannot be ruled out.

“As we all use energy domestically and for transport, most green taxes you
can think of tend to hit the poor (who devote a higher proportion of their income to utility bills than the rich) hardest.

“The challenge is to design green taxes which are not so regressive as to be politically unacceptable”.

“In contrast to last year, when the Chancellor had to halve his estimate of
economic growth, this year he should be able to upgrade it.

“2006 looks like coming in at around 2 3?4 %, above the 2-2 1?2 % forecast at the time of the Budget and an improvement on last year’s sub-2% outcome.

“For 2007, the Treasury will probably stick to its projection of a further
acceleration to around 3%.

“Private forecasters are less sanguine, expecting instead a slowdown to 21%.

“While there is general agreement that consumer spending will remain
relatively subdued, reflecting high debt levels and rising interest rates,
the Treasury is hopeful of a rebalancing of growth.

“Others, however, suspect that this year’s export recovery will run out of
steam as the global economy cools, while business investment remains
erratic

“:The Chancellor will also provide an update on the public finances. In the
first six months of the financial year, the current budget deficit,
projected to halve over the year as a whole, has shown little sign of
improvement.

“Revenues have been more or less in line with forecasts, but
spending has been running ahead.

“This year, commentators have been less obsessed with the golden rule (that
current spending must be matched by current revenue over the economic
cycle), perhaps because last year’s extension of the cycle also built in a
bigger financial cushion.

“However, on current trends the margin for error in meeting the rule in 2008, when the cycle is expected to end, is narrowing apace.

“The real issue, though, is what happens in the next cycle. On current
plans, the books will be balanced by constraining spending growth to below
the growth rate of the economy, whereas in recent years it has been
increasing a lot more quickly.

“The pre-Budget report will probably confirm this intention, but we will have to await next summer’s Spending Review and perhaps a new chancellor – for details of the squeeze.”