Gordon Brown will face some difficult choices in the coming months due to economic uncertainty and the revised GDP growth of 2%, a pre-Budget report published by PwC said.
According to the Big Five firm, if spending increases in health and education continues at 5.5% after 2003/4 the treasury’s finance will take a hit of Pounds 10bn in order to retain its current budget surplus.
The other alternative is to considerably reduce the rate of public spending after 2003/4. The move however is not consistent with the government’s stance on prioritising funding in public services.
A compromise alternative, the firms said, would be to defer tax increases due to be implemented between 2003/4 and 2005/6 in the Budget next March, allowing the chancellor to continue his prudent approach.
Deferred tax increases could be the chancellor best option given that next July he is committed to outlining his spending plans for 2005/6. With the economy spiralling into a slowdown, next summer would not be the appropriate time to announced tax increases, concluded the analysis.
But finding acceptable tax increases ‘of the order of Pounds 10-12bn may not be easy’. PwC suggests that further increases in petrol duty, tobacco and alcohol duty ‘seem unlikely’ and could be ‘counterproductive’. Neither would any significant increases in corporate taxes be seen as helping the government’s relationship with business.
‘These difficulties suggest that the chancellor may prefer to restrict tax increases to a more modest level of perhaps Pounds 4-5bn per annum,’ the report said.
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