While David Cameron's so called era of austerity remains largely on hold, it should be remembered that today's announcement was the first of three budget statements anticipated over the next 8 months.
Round 2 will be the Spring Budget, the last Budget before the General Election (by 3 June 2010 at the latest) and the Conservative leader has promised Round 3 ‐ an "emergency budget" within 50 days of the election should the Conservatives win. Undoubtedly, the next UK Government will want to get its most painful measures introduced early on in its five year term so these will become apparent post‐July 2010.
Growth forecasts for 2010 remain unchanged
Today the Chancellor lowered his estimate of economic growth for 2009 from a range of ‐3.25% to 3.75% to a mid‐point of ‐4.75%. It should be pointed out that the Chancellor’s forecast back in April was in line with the consensus market opinion at that time. Next year, the UK economy is expected to record growth within the range 1.0% to 1.5%. This represents no change on the April projection and compares with the Consensus view of 1.2% and our own forecast of 1.5%. The HMT forecast for 2011 also remains unchanged at 3.25% to 3.75%.
NI gets an additional £28m from today’s announcement
While today’s PBR did not include public expenditure cuts for NI, and actually provided an additional £28m, these are expected to follow in due course. In the short‐term, the Executive has to navigate its way through current pressures which include funding the water charges subsidy (£240m per annum); a civil service back pay claim (around £200m) and a capital receipts shortfall running into several hundred million.
The DFP Minister, Sammy Wilson, has already announced the need for £370m of cuts this financial year. Of the £28m, £8m will go to the Executive while the remainder will be spent on additional state benefits.
Addressing NI’s ‘Fiscal Deficit Attention Disorder’
Whilst the majority of NI’s citizens are well versed in our local politics, they have much less understanding of our public finances. Arguably, this has fuelled unrealistic expectations of what NI can afford and how far current revenues can be stretched. As a result, the local electorate are ill prepared for the public expenditure correction that is set to occur. Decades of Direct Rule have contributed to NI’s “fiscal deficit attention disorder” whereby the fundamental parameters of NI’s public finances were largely ignored as they fell to Westminster. While this is still largely the case, the UK’s fiscal deficit has become unsustainable and by extension so too has NI’s.
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With thanks to Richard Ramsey, Ulster Bank economist