Tax rises set to spoil economic growth

A post-election tax rise could spell disaster for the UK economy, according to top accountants Ernst & Young.

The group's Item club survey revealed that reasonable economic growth in 2005 is to be interrupted, so that Chancellor Brown can avoid breaking his fiscal policy.

As a result, predictions are that tax rises will be announced to meet the black hole in finances, if Labour wins the election, scheduled for May of this year.

The Item club bases it predictions on the same economic model as the Treasury, but concludes economic growth at 2.6 per cent – below the department's 3 – 3.5 per cent forecast.

It also found that a 1 per cent increase in National Insurance contributions are likely, but not until April of next year, serving to push up the level of taxation by more than £8 billion.

Ernst & Young warned that the manufacturing sector is unlikely to pick up the lapse, should consumers stop spending ahead of the rise in employer and employee NI contributions.

"Corporate profitability, investment and tax payments are all weaker than we might expect during a cyclical recovery," said the Item Club's report.

"This will make it more difficult to adjust the economy away from the consumer and public sector."

The Centre for Policy Studies said that despite claims from Tony Blair that the Treasury is accurate in its predictions, the average overshoot over the past five years has been £11 billion.

Speaking to the Sunday Times, director of the group, Ruth Lea said that a continuation of these overshoots would mean "Labour would clearly need to increase taxes."

Item added that the public finances have now deteriorated in recent years to "an unsustainable deficit," with the current budget in the red by 1 per cent of GDP, or in excess of £10 billion.

Professor Peter Spencer, chief economic adviser to the Item Club, said: "The main risk to the UK economy does not come from a collapse in consumer confidence in 2005 but from a retrenchment in government spending, post-election.

"Consumers are balancing their household books rather better than the Chancellor is balancing his Budget Red Book."

Some positive news was however reserved for householders, with finances expected to remain "in relatively good shape."

The forecasters predicted that the number of housing transactions will fall this year, with property values set to marginally decline, while high street spending remains robust as real prices of most goods continue to fall.

Interest rates are tipped to remain at or around 4.75 per cent, after what Item regard as good calls by the Bank of England to raise rates to cool the housing market and the appetite for consumer spend.

However, the group said an opportunity for rate intervention was missed by the MPC earlier in 2004, which would have significantly eased the strength of sterling.

 

25th January 2005

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