Budget may have underestimated risk to economy

Alistair Darling may have underestimated the risks facing the UK’s economy in his 2008 Budget, a report by the Treasury Select Committee has warned.

Despite the chancellor lowering government forecasts for economic growth over 2008 and 2009 in his March Budget, the Committee’s report claims that the Treasury faces a challenge in meetings its targets.

In the 2008 Budget, Darling downgraded the forecast of GDP growth to 2.25% in 2008, 2.35% in 2009 and 2.5% in 2010.

But the Committee’s report notes that some evidence suggests these forecasts are still “optimistic”. It also warns: “The continuation and intensification of turmoil in the financial markets threatens to affect the real economy via the price and availability of credit, which has already begun to dampen private consumption and investment.”

The report concludes that the Treasury’s optimism is based on the assumption that the UK is better placed than other countries to withstand global market turmoil.

But it warns that some of the UK economy’s characteristics, such as rising house prices, a close relationship with the US and a reliance on the financial services industry, could be “conduits” through which the global crisis infects the UK economy.

John McFall, chairman of the Committee, said: "The Treasury’s forecast of economic growth in the next two years is more optimistic than the consensus view.

“Critical to this forecast is the resilience of the UK economy to shocks. Some of the very things that have kept our economy growing over the last decade may start to cause us problems, and the 2008 Budget may not have recognised this fully.

“The government’s own forecasts show that it will be extremely tight as to whether, in future, it will meet the sustainable investment rule.”

He added: “The government is going to have to be extremely vigilant in how it manages the public finances if it wishes to maintain its so far clean record in meeting its own fiscal rules.”

The report also concludes that the main losers from the abolition of the 10 pence rate of income tax are those below the age of 65 with an income under £18,500 who are in childless households.

It says they seem an "unreasonable target" and expresses a concern over the poor take-up rate of working tax credit among eligible families without children.

McFall said: “While tax simplification is a laudable aim, it seems strange that the abolition of the 10 pence starting rate of income tax, disadvantages mainly low income households.

"As such, the government must ensure that these people are identified, and appropriate help given to them to ensure they receive the benefits to which they are entitled.”