Vicky Pryce, Chief Economist, KPMG said, "The Chancellor presented a favourable picture of the UK growth and inflation outlook in his budget. GDP was forecast to grow by 2¾ % to 3¼ % in the year 2000 and by 2¼ % to 2 ¾ % in 2001. Retail price increases are expected to stay within the target of 2.5%. However, the recovery in manufacturing output is expected to be relatively subdued and the current account of the balance of payments is likely to deteriorate sharply to £20bn this year.
"Overall, the budget was more prudent than most people had expected with a large part of the fiscal surplus used to abate debt. After a public sector debt repayment of £12bn in the current financial year, way up from the expected net borrowing of £3bn forecast last year, the Chancellor will also use a part of the fiscal surpluses coming in the following two years to repay debt. Any 'give-aways' of any significance have focussed on extra spending rather than personal tax cuts with health and education the main beneficiaries with the extra £4bn of public spending in 2001. The net debt repayment is forecast at £6.5bn next year and £5bn the year after.
"Apart from the pre-announced 1p cut in income tax, the measures are unlikely to significantly further boost consumer spending. Personal disposable incomes will in any case be negatively affected by the abolition of MIRAS and of the Married Couples' Allowance and the increase in Stamp Duty on house purchases just announced in this budget. If anything, the fiscal stance adopted in the budget should therefore suggest less upward pressure on interest rates from the Bank of England's Monetary Policy Committee. The Chancellor would be loathe to see his budget lead to a further strengthening of sterling as a result of interest rate rises given the recent well publicised concerns about the un-competitive level of the pound.
"The budget should be viewed as setting the scene for the pre-election campaign. There was an emphasis on the most emotive areas of education and health and the measures are likely to be followed by increased spending over the next 3 years when the Comprehensive Spending Review is published in July. This will probably then be followed by further income tax cuts for 2001/2002 likely to be announced in the November pre-budget report."
For further information, speak to your usual KPMG tax contact.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
