BusinessCompany NewsLies, damn lies and statistics …

Lies, damn lies and statistics ...

With the Pre-Budget report approaching, it is timely to consider the state of the public finances. Assuming a gradual economic recovery, our analysis suggests that the budget deficit is likely to rise from around £33bn (3% of GDP) in the current financial year to around £40bn (3.3% of GDP) in 2005/06, as compared with a Treasury budget forecast of around £23bn (1.9% of GDP) in the latter year.

The £17bn difference reflects somewhat lower expected GDP growth in our projections, and a significantly smaller rise in the ratio of income tax and corporation tax receipts relative to GDP than projected by the Treasury.

The Treasury would still be able to claim that its golden rule of borrowing only to invest would just about be met on average over the current economic cycle, but only by a very narrow margin based on our projections. Looking ahead to the next economic cycle, the picture is far less rosy. The chancellor will either need to deliver a tight spending review next year, with no real increase in areas other than health and education in 2006/07 and 2007/08, or introduce significant tax increases at some point over the next four years.

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