LONDON, 1 December – Despite the likely upward revisions to the UK economy’s growth forecast, a disappointing recovery in tax receipts means that the Chancellor will struggle to offer many ‘giveaways’ when he delivers his Autumn Statement this week, according to the EY ITEM Club preview published today.

The report says that while the Office for Budget Responsibility (OBR) is likely to add between 0.25% or 0.50% to its forecast for GDP growth in 2014, combined revenues from income tax, national insurance contributions and capital gains tax are expected to fall £8bn short of the OBR’s March forecast in 2014/15. The forecast for Public Sector Net Borrowing (PSNB) for the same period is also expected to be revised up by £9bn to £95½bn. With borrowing forecasts for future years also set to be revised upwards, the Chancellor is likely to be told that he is on track to deliver a surplus a year later than he originally planned, in 2019/20.

Martin Beck, Senior Economic Advisor to the EY ITEM Club comments:

“In recent Autumn Statements, the Chancellor has been able to trumpet a series of upward revisions to the OBR’s growth forecast as evidence that his economic plan is working. However, that’s where the good news is likely to end. The improvement in the public finances is in danger of not just stalling but going into reverse. With just five months to go it appears virtually impossible for the government to achieve the OBR’s current forecast for borrowing in 2014-15.”

Little room for pre-election giveaways
According to the report, the persistent weakness in income tax receipts is the key factor behind the failure to reduce the deficit. This is due to low wage growth, a shift towards low-paid jobs and an underestimation of the impact on revenues of successive large increases in the income tax personal allowance. The OBR is likely to revise down its forecasts for revenues throughout the forecast horizon, forcing the Chancellor to employ further spending restraint in 2019-20.

The disappointing performance of the public finances also means that the Chancellor has very limited room for manoeuvre at the Autumn Statement. Any giveaways will need to be clawed back elsewhere.

The EY ITEM Club says that while the Chancellor has previously announced a string of increases in the personal income tax allowance, this is unlikely to be repeated. It warns that as well as being expensive such increases are becoming increasingly ineffective at helping the low paid. Instead, the report says that it is likely that the Chancellor will announce measures in three key areas: devolution of powers, business rates, and rebalancing of the economy.

Devolution of powers
The EY ITEM Club says that with the election fast approaching, the Chancellor will be looking for vote-winning schemes which are largely cost free and so further announcements to create more combined authorities of councils with powers over policy areas, such as borrowing and local transport, are likely. Devolution of powers could see an expansion of the UK’s current 24 enterprise zones across the UK, as well as an early indication of the Government’s support for a high-speed “HS3” rail link in the north of England.

Support for business
Although the Chancellor has done much to help companies by reducing corporation tax, he is under increasing pressure to address the problem of business rates. In 2013/14 cash receipts from business rates were equal to 70% of revenue raised from corporation tax, up from less than half in 2007-08, according to the EY ITEM Club. In light of this and growing concerns from business, the report says announcements of more frequent revaluations or even allowing owners of business premises to offset some of the cost of investment against rates paid can be expected.

Rebalancing the economy
In an attempt to show support for SMEs and for manufacturers at a relatively small fiscal cost, the EY ITEM Club says that the Chancellor could extend the temporary rise in the Annual Investment Allowance to £500,000 beyond the current cut-off date of December 2015.

Concluding Martin comments:

“With the fiscal cupboard bare, the Chancellor will have little room for manoeuvre. But as this is one of the last opportunities to announce measures that can meaningfully impact on individuals before the country goes to the polls, the temptation for the Chancellor to do something is likely to prove too irresistible to miss.

“We expect the Chancellor to repeat his Budget 2014 strategy, where giveaways designed to provide a short-term boost were financed by a future squeeze on spending. But, on the whole, his speech will be about promises, rather than pounds.”