Treasury committee not convinced by government’s “optimistic” growth forecasts

May 6, 2009 at 4:08 pm Leave a comment

gdpgraphUK GDP growth 2004 – 09 – source: ONS

by Tony Grew

The powerful Commons Treasury committee has published its report on the 2009 Budget with a stark warning to the government that it is “not convinced” by forecasts of growth.

The report states it is “possible” that the Government will meet its growth forecast but it is an “optimistic assumption.”

The committee also expressed concerned that the sharp recovery in consumption forecast for 2011 might be too optimistic given that the UK economy will only just have emerged from a sharp downturn.

In last month’s Budget the Chancellor of the Exchequer, Alistair Darling, said he expected the UK to start expanding again by the end of 2009 and record a 1.25% expansion in 2010.

He also predicted that exports helped by a weaker pound would lead to growth of 3.5% in 2011 and continue to grow at at least 3% in 2012 and 2013.

“There is, understandably, considerable uncertainty around the Government’s growth forecasts for 2009-2011, reflecting the fact that the UK economy is in uncharted territory,” the report said.

“This uncertainty is demonstrated by the large number of independent forecasts which are more pessimistic than the Government as well as the smaller number of forecasts which are more optimistic.

“In particular, we note that the IMF believes the UK will continue to contract in 2010. Whilst it is possible that the Government will meet its growth forecasts, on the available evidence, this is an optimistic assumption.

“We question the decision to assume that the economy will begin registering positive growth as early as the fourth quarter of 2009, and that the economy will register such strong growth in 2011.”

John Mc Fall MP, Chair of 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. We are also concerned about the as yet not fully realised impact of the recession on unemployment, particularly amongst the young.

“Periods of unemployment whilst young can be more damaging than at any other time. We cannot afford to have a lost generation on our hands.

“Whilst we welcome the measures to boost employment in the Budget, particularly those aimed at the young, we will continue to monitor their effectiveness closely.”

The committee also reported “considerable uncertainties” over the amount of money that will be raised by the new 50 per cent top rate of income tax.

The report recommends that the Treasury should report on the revenue raised, both nominally and as a percentage of the theoretical maximum revenue, by the new top rate of income tax, and assess at that time the yield obtained from the higher rate against its disadvantages.

The committee said that if the higher rate were to continue it would be appropriate to consider what reforms are required to prevent further leakage.

The Treasury should also indicate if it would revise the rate in the event that the estimated revenue yield fell well below its forecasts.

“We acknowledge the pressure on Government finances but the lack of any substantial measure to combat child poverty in both the Pre-Budget Report last year and this Budget is alarming,” said Mr McFall.

“On current indicators the Government will fail to meet its 2010–11 target to halve child poverty by a significant margin.

“Though spending in this area may not seem a priority amidst the sudden collapse of banks, in the long run it is the right thing to do. Nearly four million children in this country are still growing up in poverty.

“They are suffering now: they are likely to experience ill health, to underachieve in school and to be denied the opportunities that others are given. Indeed, child poverty and youth unemployment are linked.

“Now more than ever it is vital to support our young people. They will be the ones who will help us out of these difficult economic times; investment in their future is just as important as support for banks and businesses.”

Click here to read the full Treasury committee report on the Budget 2009.

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