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UK Chancellor Lowers Growth Forecasts in Annual Budget (Update 3

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UK Chancellor Lowers Growth Forecasts in Annual Budget (Update 3)
(03/12/08 15:25) (CEP News) London – The UK Chancellor of the Exchequer, Alistair Darling, revised the country's 2008 GDP growth forecast on Wednesday to 1.75%-2.25% from the 2.00%-2.50% range released in the pre-budget speech in October. The October forecast was a downward revision from the 2.5%-3.0% range. Delivering his first budget speech to Parliament as Chancellor, Darling also lowered GDP for 2009 to 2.25%-2.75%, below the 2.5%-3.0% range stated previously, but he maintained the GDP growth estimate for 2010 at 2.50%-3.00%. The revisions bring his department's forecasts closer, if not in line with, those stated by the Bank of England in its February quarterly inflation report. With regards to inflation, Darling said he sees it stabilizing at the 2% target by 2009, but expects CPI inflation during 2008 to hover around 2.5%, reflecting the increases in global commodity and energy prices. "Turbulence in global financial markets, starting in the U.S., has spread across the world - and this poses a major risk to the world economy. Britain is more resilient and more prepared to deal with global shocks. This budget is about equipping Britain for the times ahead... about building a fairer society," he said. Darling also revised public sector borrowing figures for the coming years. For the fiscal year 200809, borrowing was slated at £43 billion, up from £36 billion previously; 2009-10 at £38 billion from £31 billion; 2010-11 at £32 billion from £28 billion and for 2011-12 at £27 billion from £25 billion. For the current fiscal year to April 2008, he pegged public sector net borrowing at £36 billion, around £1.4 billion lower than forecast in October. Furthermore, he sees public sector net investment rising from £33 billion in 2009 to £37 billion in 2010 - the highest in three decades. "We will borrow only to invest. Borrowing for investment within the fiscal rules, means that we will meet our second fiscal rule," he said. Darling added that public spending in the coming three years will grow by 2.2% and by a rate of 1.9% after 2011. The latter, he said, "will allow departmental resources to continue to grow at broadly the same rate as in the next three years." Spending on frontline activities of the UK armed forces is to be boosted by £2 billion, he added. Elsewhere in his budget, while delaying a planned rise in domestic fuel duty, the Chancellor also looked to appease UK businesses. He announced that the UK Corporation tax will fall to 28% from 30% by April this year, with simpler taxes for small companies. Darling also pledged to provide more help for small businesses, with the capital gains tax remaining at 10%. He also announced plans to set up a capital fund of £12.5 million to encourage more women entrepreneurs. Darling plans to levy a charge on plastic carrier bags. "We will introduce legislation to impose a charge on them if we have not seen sufficient progress on a voluntary basis," he said. Legislation could come into force in 2009. Darling also announced the duty on tobacco will rise, adding 11 pence to the price of a packet of 20 cigarettes and 4 pence to the price of five cigars effective Wednesday. On alcohol, UK taxes will rise by 6% above the rate of inflation as of midnight on March 16. Alcohol
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UK Chancellor Lowers Growth Forecasts in Annual Budget (Update 3)

duties will increase by 2% above the rate of inflation in each of the next four years, Darling added. UK opposition parties and business lobby groups slammed the budget while economists and market observers interviewed by CEP News thought it was fairly predictable. Opposition Conservative party leader David Cameron said, "This government and the prime minister (Gordon Brown) took all the credit when the global economy was growing, but now there are difficulties they will not take any of the blame." In a heated exchange in Parliament, Cameron said the facts Alistair Darling's first budget could not hide were high UK debt, high interest rates, high taxes and lower growth. "They tell the story of just how badly prepared we are for the downturn," he added. "For the British people, every time they refinance their mortgage, it's costing them more, every time they fill up their car they are paying more. Every time they shop, food bills are higher and yet every time they get a tax bill, they are paying more. There was no recognition of that in this budget. The cost of living is going up and Labour (party) is making it worse," Cameron said. He accused the chancellor and prime minister of living in an entirely different world from everybody else. "The U.S. was cutting taxes by 1% of national income and Sweden had a 2% budget surplus to help them out. In the UK we have got nothing, no room for manoeuvre on the deficit, no room for manoeuvre on interest rates and no room for manoeuvre on taxes," Cameron said. "Only Hungary, Pakistan and Egypt had more debt as a share of national income than the UK. In the years of plenty, the government put nothing aside, they didn't fix the roof when the sun was shining," he concluded. Nick Clegg, leader of the Liberal Democrats - the UK's smallest political force by number of MPs said, "The chancellor had over-egged any good news. This is a meagre, tinkering budget which gives precious little help to the poor but maintains special treatment to the rich - a budget designed to fill a black hole masquerading as good for the environment." Politicians were not the only ones claiming Darling had got it wrong. Howard Archer, Chief UK economist at Global Insight, said that even though the Chancellor cut his GDP growth forecasts for 2008 and 2009, they still look too high. "As expected, the Chancellor played up the economy's performance over the past decade under the Labour government and attributed much of the UK slowdown in 2008 to a deteriorating global environment," Archer said. Archer said the public deficits forecasts for 2007-08 are similar to those in last October's PreBudget Report. "Darling has nevertheless had to raise the forecasts for the coming years. There is a very real danger that public borrowing and current budget deficits will be significantly higher than he now forecasts, given that his GDP growth forecasts look optimistic," he concluded. Angus Campbell, Head of Sales at Capital Spreads, said it was one of the most boring UK budgets in recent memory. "The growth forecasts are still more bullish than what the market expects and the chancellor runs the risk of struggling to meet his borrowing targets in the next two years,” he said. His colleague and managing director of Capital Spreads, Simon Denham, said the Chancellor is clueless about how to get himself out of the hole dug for him by the Blair-Brown due and is fronting a government that has ducked every single difficult decision for 10 years in the hope that they might finally lose an election and leave handing out the nasty tasting medicine to somebody else. "The treasury mandarins are equally unable or unwilling to persuade the Government as to the seriousness of the situation and the need for some urgent strong political management. This budget effectively signals that UK public fiscal policy will drift for another two years by which time
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UK Chancellor Lowers Growth Forecasts in Annual Budget (Update 3)

Public Sector debt (and future liabilities) may be well and truly beyond saving without very serious recessionary decisions having to be taken," he concluded. "The consequences of the last 10 years profligacy of taxpayers' money may well lead to social upheaval as we are either forced into printing money thus causing much stronger inflationary pressures or cutting back dramatically on the Social Welfare budget at a time of falling job prospects,” was Denham's gloomy prediction. The Chancellor found some words of sympathy from Stephen Gifford, Chief Economist at Grant Thornton, who said Darling could do little else with his first budget but hope to stem the tide of a slowing economy and try to shore up the public finances with tax rises on such things as polluting behaviour and alcohol. "In essence, Darling's budget was the placating dummy offered to an economy on the verge of a tantrum. It seemed Darling was more interested in espousing the virtues of the UK's resilience to the credit crunch compared with the weaker performances of its peers, than offering an olive branch to the taxpayer," he concluded. Lisa Macpherson, National Director of Tax at PKF, points out that there are likely to be some budget incentives for small businesses and entrepreneurs following the Chancellor's climb down over capital gains tax and the creation of entrepreneurs' relief. "However, the complexity of the UK tax system means that tax breaks for small business usually come laden with caveats and red tape, making them sometimes 'more trouble than they're worth' for the small business," she opined. A corporate tax cut to 28% would not go far enough in the eyes of global businesses said Stephen Herring, Tax Partner at BDO Stoy Hayward. "The UK will remain behind the curve in its reductions of the headline rate of corporation tax. Many other leading developed countries such as the Netherlands and Germany already have lower corporation tax rates and some EU members such as Ireland, Poland and the Czech Republic have substantially lower headline rates. The Chancellor should have announced a stepped reduction over 3 years to 25% to keep the UK tax system competitive internationally," he said. British business lobby heads hardly lauded the budget. Richard Lambert, Director General of the Confederation of British Industry, said the Chancellor's speech was not impressive, but added that the Lord of the treasury had nothing in his kitty to make it an impressive one. "On the surface there are no nasty surprises, but his growth assumptions are optimistic and leave him with little room for manoeuvre should things take a turn for the worse. Borrowing also looks set to rise by a further £20 billion over the next four years, which is a cause for concern," he added. However, Lambert said that there were some signs in budget that the government was at least prepared to listen. David Frost, Director General of British Chambers of Commerce, said the budget will be seen as one that saw a number of tax increases, which failed to help businesses overcome the difficult conditions they currently face, rather than one that restored the relationship between the Government and the business community. “The pre-Budget Report last October brought in a series of changes that complicated the tax system, increased taxes and made the UK a less attractive place to come and do business. Unfortunately the Chancellor has not repealed the bulk of these measures and the business community will still feel that the Government has used them as an easy target for the Treasury," Frost added.
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UK Chancellor Lowers Growth Forecasts in Annual Budget (Update 3)

Stephen Robertson, Director General of the British Retail Consortium, was not too pleased about a possible levy on plastic bags. "It's clear the Chancellor has huge holes in his accounts and is trying to hide an old-fashioned tax grab behind a bags and alcohol smokescreen. Retailers are driving efforts to achieve social and environmental objectives but the Chancellor’s green tax gimmickry is simply an excuse to take yet more money from hard-pressed businesses and consumers,” he said. Stephen Haddrill, Director General of the Association of British Insurers, said the time had come for consumers to do some belt tightening after a grim budget. "Many people face higher taxes and tough news about the economy. Consumers need to protect themselves, especially those who hold part of the UK’s £1.4 trillion consumer debt. They should review their finances and consider whether to insure themselves against losing their job or becoming ill," Haddrill said. The ABI director general also accused the government along with his peers about a lack of consultation on contentious tax issues. By Gaurav Sharma, gsharma@economicnews.ca, edited by Stephen Huebl, shuebl@economicnews. ca (END) ©CEP Newswires - ©CEP News Ltd. 2008. All Rights Reserved. www.economicnews.ca

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