The government is unlikely to raise personal taxes until 2007 at the earliest
due to a weak economy, Ernst & Young’s Item Club has predicted.
Its summer forecast says that the economy is growing slower than expected at
2.1% for 2005, and any tax increases would have to be put on hold because UK
consumers would not have the finances to tolerate any rises.
It predicts that the Bank of England will cut interest rates in August by a
quarter of a percent, but even this would not be enough to boost consumer
confidence and spending to allow for tax rises next year.
The club predicts that the slow growth in the economy may begin to rally by
the end of this year with increased activity on the High Street and a reasonably
buoyant housing market.
‘Consumers are tightening their belts, which is necessary and welcome,’ said
Professor Peter Spencer, chief economic advisor to the club. ‘The housing
market, against all odds, is showing renewed signs of expansion.’
Spencer added that bond markets were ‘remarkably robust’, equity markets were
moving strongly and the prospect for the consumer remains positive and
He was less optimistic about public finances. Last week, Chancellor Gordon
Brown caused controversy after deciding to start his fiscal cycle two years
earlier in 1997 rather than 1999. These were more buoyant years and are thought
to add about £10 to £12bn in his coffers to avoid breaching his golden rule.
Spencer warned he will start his next economic cycle in a weaker position.
‘The Chancellor’s big problem is that he will start the next cycle in serious
structural deficit with no obvious political widow for correction.’
This will not be helped by poor investment and export figures, despite a
strong recovery in UK company finances. UK export figures are down from 2.8% to
2% due to the strong pound.
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