Euren News

UK : Chancellor puts reform of the tax system at the top of the 2012 Budget agenda

Euren, Oxford Economics - N.2/2012, avril 2012

19/04/2012

This Autumn the Chancellor announced a number of small-scale spending measures aimed at boosting the productive potential of the UK economy. The 2012 Budget contains a package of measures being largely concentrated on reforming the tax system, with a clear focus on business. The Chancellor announced a further 1 percentage point reduction of the main rate of corporation tax, with further reductions planned to take it to 22% by April 2014, and a reduction of the top rate of income tax from 50% to 45%.

These measures form part of the Government’s plan to create the “most competitive tax system in the G20” which, the Government hopes, will be sufficient to encourage business to play a greater role in the recovery. There is some logic behind this strategy. UK firms have built up their largest cash surpluses in thirty years, with large firms enjoying both healthy balance sheets and good access to credit at low cost, so business certainly has the resources to play a significant role. However, to date they have been reluctant to spend, either on investment or recruitment, citing uncertain growth prospects as the key constraint. Improving the general climate for business is clearly playing a long game.

The 2012 Budget came two years into what is now a seven year austerity programme. The progress made to date is encouraging, although there remains a long road ahead.
Most of the retrenchment to date has come through higher taxation and around 90% of the planned current spending cuts are still to be made. The Chancellor may have to announce additional tightening further down the line, because the forecasts on which his plans are based look a touch optimistic. The financial crisis has caused significant damage to potential output and the recovery is likely to be weaker than that forecast by the Office for Budget Responsibility (OBR).

Oxford Economics weaker forecast for growth means that borrowing is unlikely to fall as quickly as the Governement hopes, while weaker forecast for potential output means that a greater share of the reduction in borrowing is cyclical in nature. Therefore, while the OBR continues to judge that the Chancellor is complying with his fiscal mandate, i.e. that there is a greater than 50% chance of achieving cyclically-adjusted current balance by the end of 2016-17, Oxford Economics forecast shows this target being narrowly missed, with the gap being around 0.3% of GDP.

Article rédigé par Andrew Goodwin, d' Oxford Economics , membre du réseau Euren .

EUREN : Growth will continue to be moderate in 2012 in Europe

EUREN Winter Forecast 2012 - N.1/2012

17/02/2012

Alain HENRIOT

According to most indicators, the economic situation in the Euro area is currently feeble. Domestic demand has contracted in many countries, especially in the peripheral ones where the financial strains are strong. This gloomy picture will hold in the first part of 2012.

Negative effects of the restrictive factors of the last months of 2011 will continue to work at least for some time. For some quarters public expenditure will tighten in order to reach fiscal targets.The huge consolidation efforts will affect public and private consumption in many countries.

Only in the second half of 2013 the upswing in the Euro area will be strong enough to allow some minor reduction in unemployment. The demand of firms is expected to be ex-tremely weak, even if in some countries the investment cycle is still steady.

The reduction in domestic demand, at least for 2012 will be balanced by the external demand.This is especially true for peripheral countries.

More than in the recent past we are observing the split of Euro area into at least two groups: The “core” countries (among which Germany or Austria), which recorded high growth rates and will in 2012 observe, in the worst case, a slowdown of expansion and the peripheral countries (as Italy or Spain), which are lagging, have competitiveness problems to solve and will very likely experience a recession.

Numéro précédents

• 02/12/11 - Public finances in the European Union in 2011 and forecasts for 2012 [Euren News] - N.5/2011, Novembre
• 19/07/11 - The EUREN summer forecast 2011/12 : Temporary slowdown in global growth [Euren News] - N.4/2011 - juillet 2011
• 23/06/11 - Greece: Macroeconomic developments and prospects 2010-2012 - Fiscal adjustment and reforms [Euren News] - EUREN-News, N.3, juin 2011
• 19/04/11 - New EU Member States: Growth will accelerate further [Euren News] - N.2 - avril 2011