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Economists question Chancellor's optimistic arithmetic

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24th Mar 2010
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The UK’s total borrowing for the year has come in at £11 billion less than the Chancellor predicted in December’s pre-Budget Report, but economists are warning that overly optimistic growth projections mean the Chancellors pledge to halve the deficit by 2014/15 simply doesn’t stack up.

Figures announced in the Budget show that government borrowing for 2009/10 - which had been predicted to reach £178bn – have now come in at £167bn, largely due to lower-than-expected unemployment and an increase in tax receipts.
Tax receipts from VAT were £3 billion higher than expected, and an increase in income tax and corporation tax receipts also helped boost the revenue coffers, the Chancellor said.
Next year borrowing would reduce to £163 billion, Darling said, in part thanks to one-off factors boosting tax receipts such as this year’s 50% tax on bankers’ bonuses, which he said had raised £2 billion, more than twice as much as had been forecast by the Treasury. He went on to add that long term reform of the banking sector was needed to prevent excessive risk taking.
But Ernst & Young’s ITEM Club accused the Treasury of manipulating its growth forecasts in order the meet its commitment of halving the deficit over four years.
Hetal Mehta, senior economic adviser to the accountancy firm’s think-tank told Finance Week: "The Chancellor has switched his borrowing measure since the PBR so it now excludes financial sector intervention.”
Although a return to a VAT rate of 17.5% and the one-off bankers’ make near term projections look reasonable, Mehta said Treasury predictions for GDP growth and the recovery of tax revenues were “eye-wateringly high" and made the objective of halving the public deficit implausible.
And despite maintaining his pledge to halve public borrowing over the next four years, Darling remained tight lipped on how the government expects to make £11bn of public sector efficiency savings by 2012/13 announced in December’s PBR.
Although the Red Book outlines budget savings by department, we will have to wait for announcements by individual departments as to how those cuts will be achieved. He did say that 15,000 public sector posts would be relocated outside of London as part of its cost cutting measures.
“Efficiency savings are a bit of a smoke screen,” Mehta said. “It seems implausible that such a reduction could come from efficiency savings alone.”
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