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Economics expert gives verdict on Budget 2011

"A few green shoots, but it will continue to be a long hard winter for the British economy," notes Rachel Male, Lecturer, of the School of Economics and Finance, Queen Mary, University of London in her verdict on the Budget 2011. 

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"Certainly in the short-term the outlook is bleak, with growth forecasts downgraded, increasing unemployment and inflation fuelled in part by the VAT increase imposed in the last budget and the prolonged troubles in the Middle East.

"So what does the latest budget offer for the UK economy? Whilst the chancellor, George Osborne, has offered a small rest bite to motorists with a 1p per litre cut in fuel duty rather than the proposed 1p plus inflation increase, this still represents a net increase in fuel duty of 2p per litre since the end of 2010.

"This reduction is to be funded through a new fair fuel stabiliser, which is expected to raise £2 billion per year for the next five years to directly offset the reduction in fuel duty. Thus, this tax cut comes without an increase in government expenditure; however there are no guarantees that the oil companies will not simply pass the increase in costs onto consumers.

"There was also some good news for people on low incomes with a further increase in the personal allowance from £7,475 to £8,105 in April 2012, which was not, as previously anticipated, combined with a reduction in the higher tax bracket. A further boost was provided to low income public servants, earning less than £21,000, who will further benefit from a pay uplift of £250 per year.

"However, with high inflation and no foreseeable increase in wages for the majority, most people will continue to see their real wages fall and thus the government should not expect a significant increase in consumer expenditure as a result of these reliefs. Furthermore, these benefits are combined with a move to CPI, rather than RPI, indexing of direct taxes, which will see the government benefit from an extra £1bn in tax revenues by 2015/16.

"There is better news for business, with corporation tax to be cut by 2% this year, then 1% per year for the next three years, which will be of particular benefit to large companies. Whilst, to ensure that the banks do not benefit from this reduction, there is to be an equivalent increase in the bank levy. For smaller companies, there should be additional benefit from the increase in R&D tax credits.

"There is also help for the construction industry, with £250 million in support for first time buyers under the proposed FirstBuy programme, and plans to reform stamp duty land tax rules for bulk purchases, with the aim of strengthening residential property demand. Additionally, deprived areas of the UK should benefit from 21 new Enterprise Zones.

"Nonetheless, all of these changes are relatively small with the overall emphasis on achieving the desired reduction in the deficit. From an economic point of view, George Osborne’s lack of a plan B will continue to boost the credibility of the government’s approach and should help to maintain the low interest rates on UK borrowing.

"However, with many cuts from the last budget still to be implemented and ever increasing pressure on the monetary policy committee to raise interest rates, the overall picture for the UK economy is one of contraction rather than expansion."

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