MPs slam ?unrealistic? Budget forecasts By Daniel Pimlott, Economics Reporter
FINANCIAL TIMES Published: May 6 2009 13:34 | Last updated: May 6 2009 14:25
Government forecasts in the Budget that the recession would end this year and the economy would rebound came under attack as not ?realistic? on Wednesday from the Labour-controlled Treasury select committee.
The bipartisan committee, which monitors economic policy, also questioned the rules restricting public spending and the effectiveness of the new higher tax rate of 50 per cent, while warning that the government was set to miss its target of halving child poverty by
2010-11.
The critical report heaps further embarrassment on the government, after the growth predictions that formed the backbone of Budget estimates for future tax revenues and spending had been questioned for presenting an overly rosy outlook for economic recovery.
?Whilst it is possible that the government will meet its growth forecasts, on the available evidence this is an optimistic assumption,? the committee said in its report on the Budget.
It said it ?questioned? the assumption that the UK economy would start to grow again by the end of this year, and quickly rebound to a strong level of growth that would be maintained for many years.
John McFall, the Labour MP who chairs the committee, said: ?As the chancellor said we are living in extraordinary and uncertain times. However, we are not convinced that the Budget forecasts fully acknowledge this uncertainty. We all want to see a way out of recession, but we need to be realistic.?
George Osborne, shadow chancellor, said: ?This report from a committee with a Labour majority is a huge blow to the credibility of the chancellor. It vindicates the economic judgments [Conservative leader] David Cameron and I have made as we have warned about the alarming rise in national debt and the absence of any credible plan from the government to deal with it.?
A Treasury spokesman said: ?The government will consider the committee?s report and respond in the usual way. There is significant uncertainty surround economic forecasts at this time, as a result of the exceptional nature of the global financial crisis and its effect on the world economy. However, the government?s fiscal forecasts are based on cautious assumptions and the judgements we made remain unchanged from the Budget.?
The Budget saw a substantial downward revision to growth forecasts, with the Treasury expecting a contraction of 3.5 per cent in 2009, followed by a resumption of economic growth of 1.25 per cent in 2010 and a sharp increase of about 3.5 per cent in 2011.
By contrast, many City economists expect the recovery to be weaker, while the IMF has recently issued a much weaker forecast that the UK economy would contract by 4.1 per cent this year and a further 0.4 per cent in 2010.
A deeper recession this year and a weaker recovery than the Treasury is forecasting would mean lower tax revenues and higher social welfare costs that would drive the public finances into an even more parlous state.
Even with the Budget forecasts, which many economists attacked at the time as optimistic, public sector net debt is set to reach 79 per cent ? nearly double the previous upper limit set by the government. Public sector net borrowing is expected to reach 12.4 per cent this fiscal year, the highest level since the second world war.
The report also calls for clearer guidance on how the public finances would be returned to a sustainable basis.
Prior to the financial crisis, the Treasury had operated under the constraints of two rules ? the ?golden rule?, stating that Budget should balance over the economic cycle, and the sustainable investment rule, limiting net government debt to 40 per cent of GDP. But these rules were jettisoned last autumn amid the escalating credit crunch in favour of the ?temporary operating rule?, which simply commits to improving the cyclically adjusted current budget by 0.5 per cent of GDP a year once the economy has emerged from the downturn.
According the committee, that only restricted government spending to how much the chancellor thought that the market for government debt would support.
?The temporary operating rule appears to us to offer no constraint at all on the fiscal decisions of the chancellor,? the report said. ?It is clear to us the only real financial discipline on the chancellor is the opinion of the gilt market on the sustainability of the public finances.?
The report also questioned the extent to which raising the higher rate of tax from 40 per cent to 50 per cent for those earning more than £150,000 would help raise revenue. The committee saw ?considerable uncertainties? over how much money the measure would raise, and asked the Treasury to report on the new tax in the 2011 pre-Budget report and ?assess at that time the yield obtained from the higher rate against its disadvantages.?
The committee also highlighted how the government was on track to miss its target of halving child poverty from 3.4m by 2010?11 ?by a significant margin?.
Government officials said the undershoot could mean that 600,000 fewer children would be lifted out of poverty than originally hoped.