UK on track but borrowing and tax to rise
Britain faces years of steeper public borrowing, slower debt reduction and higher taxes after the May election — whichever party is in power — despite the economic recovery remaining on track, according to the Financial Times’ annual survey of economists. The plunge in oil prices alongside rising incomes will continue to heal the wounds of the great recession, most of the economists surveyed believe. But in a blow to chancellor George Osborne, a large majority of the 95 respondents thought the next government was unlikely to stick to plans for deep spending cuts to reduce the deficit. After a solid year of growth, which was predicted by economists at the start of 2014, the nation’s leading forecasters expect the new year to be similar, with a "decent" recovery continuing even if expansion slows slightly. Dame Kate Barker, a former member of the Bank of England’s Monetary Policy Committee, said the fall in the oil price would boost consumption in the first half of the year. But many economists believe that the uncertainties surrounding the May election risk undermining the momentum in the economy. Sir Howard Davies captured the nervousness felt by many economists that the lack of a majority government or strong coalition government after the vote could knock back the economic recovery. "A messy coalition could be negative. Major projects would be thrown into uncertainty, and there would be market doubts about the government’s ability to take needed tough decisions," he said. The majority of economists who expressed a view said they would cut their growth forecasts if the next government sought a referendum on Britain’s membership of the EU. Whatever the result of the general election, most economists were convinced that a new government was unlikely to follow the chancellor’s current austerity plans and would instead borrow more and tax more by the end of the next parliament. Such a move would mean avoiding spending cuts to unprotected departments that a large number of the economists thought both implausible to deliver and undesirable. The expectation was that austerity would be softened with slightly higher borrowing so that public sector debt fell a little slower as a share of national income than under the government’s current plans. Few expressed fears that such an outcome — similar to Labour’s plans for deficit reduction — would undermine the nation’s international credibility on its public finances. Kathrin Muehlbronner of Moody’s, the credit rating agency, said that while the political parties differed on the speed of planned deficit reduction, "what is important from our perspective is that all the main political parties appear to be committed to further fiscal consolidation". Amid a continued strong economic recovery in Britain, there is a nagging perception among economists, however, that the Bank of England is lagging in its response to faster growth and lower unemployment than it expected. Not a single economist out of 85 who expressed a view thought the bank would raise rates before the summer, while 25, including five former MPC members, thought rate increases should come sooner. A large majority of economists thought the BoE would keep interest rates on hold at least until November, but a majority who expressed a view thought the first rate rise should either already have happened or should happen by this summer.