June 2010 Budget - Treasury Contents

Conclusions and recommendations

1.  This is the central and most difficult decision any Chancellor has to take. We have not attempted to challenge the Chancellor's judgement on the Budget as a whole. There are risks on either side of the Budget judgement. The Chancellor has chosen a somewhat more radical path than his predecessor. Furthermore, he has been explicit that his aim is not only to reduce debt, but to rebalance the economy away from the public and toward the private sector. In this Report, we examine some of the risks and uncertainties in this approach. We expect that the consequences of the Chancellor's decision will be the subject of many of our future inquiries. (Paragraph 8)


2.  Although there are problems in comparing the OBR's two forecasts, it appears that there has been a slight increase in the chance of near-term negative growth and an increased likelihood of positive growth in the outer years. We will continue to monitor the macroeconomic environment, through our regular hearings with the Bank of England and the Office for Budget Responsibility. (Paragraph 15)

3.  We note that despite a significant sterling devaluation, net trade is currently not expected to contribute positively to GDP growth in 2010. The OBR forecasts a significant increase on the path of net trade but there are differences about the speed of change. (Paragraph 23)

4.  It is unfortunate that the independence of the OBR has been called into question. This makes it all the more important to get the structure and the statutory basis of the permanent organisation right, as the both the OBR and Chancellor recognise. We will consider in our inquiry into the OBR what further steps need to be taken to ensure its independence. (Paragraph 28)

5.  The OBR's publication of forecasts for employment is new and welcome. We note the forecast of both considerable public sector job losses, and strong private sector hiring. This forecast depends on the assumptions in the wider forecasts, and is subject to the same risks. We will continue to monitor the impact of reforms on the labour market. (Paragraph 31)

6.  The economic recovery in the OBR forecast will depend, in part, on supportive monetary policy. However, in the short term, Budget measures such as the VAT increase will affect inflation. We look forward to discussing this in more detail with the Monetary Policy Committee very soon. (Paragraph 37)

7.  We note the OBR's assumption that the June Budget had no impact on trend output. We also note that the Budget did not set out a policy for improving trend growth. The Treasury recognises the need to do more work on assessing the impact of Budget measures on trend growth and we look forward to seeing it. (Paragraph 41)

8.  There are precedents for successful fiscal consolidations which were focussed on spending cuts rather than raising taxes. We also note more recent work on the impacts of varying ratios of spending cuts to tax rises. We recommend the Treasury revisit recent literature. We understand that the 77:23 split will not be reached until the final year of the forecast period. (Paragraph 49)

9.  Gilt yields have fallen in the last few months. This appears in part in response to the Budget. It must be borne in mind that other factors than the Budget may also affect the demand for gilts. (Paragraph 53)

10.  The financial crisis has shown the credit rating agencies can be wildly wrong. Excessive reliance on credit rating agencies for an assessment of credit risk is now recognised as having been a mistake. We welcome the positive comments from the agencies following the June Budget, but also acknowledge the Chief Economic Adviser's recognition that agencies tend to follow rather than lead the markets. (Paragraph 56)


11.  The proposals to reduce Housing Benefit to JSA claimants after a year are designed both to sharpen work incentives and to cut the cost of Housing Benefit. These changes to JSA will require primary legislation. The information provided by the Treasury shows that up to 300,000 individuals may be affected by this measure. However, those scrutinising the legislation would be helped by fuller information, such as the extent to which the changes affect households with children, and a projection of the numbers expected to move into employment as a result of this measure, given the Treasury's assertion that some claimants may not be fully considering certain vacancies when looking for work. (Paragraph 64)

12.  We share the Chancellor's desire to make sure that the measures are fair, both in absolute terms, and as a proportion of income. Taken together the effects of the measures in the March and June Budgets ensure that the least well off are less affected than richest. We are concerned that, as shown in Chart A2 of the Red Book, the poorest fare slightly less well than middle income groups, as a result of the impact of all measures and when considered as a percentage of net income. We acknowledge though that the June Budget is only the first part of a wider range of measures and there may be changes as a result of the current review of poverty, the Comprehensive Spending Review and future Budgets. (Paragraph 80)

13.  Despite the limitations in the data they contain, the charts in Annex A of the Red Book, which show the distributional effects of the Budget measures, are an extremely welcome innovation. We applaud the Chancellor for introducing them. We hope that in future years such charts will use a greater range of data, and provide a fuller picture of Budget effects, including the national and regional effects. We note that the Treasury has cited data problems as a reason for its inability to give a more complete analysis. We recommend that Government's data collection is improved to enable these sorts of analyses to be provided in future. (Paragraph 81)

14.  It is likely that the Comprehensive Spending Review will also have different effects on different income groups. We recommend that the Treasury builds on the approach taken in the Budget to give information about the impact of CSR changes on different households. We would like the analysis for both the CSR and future Budgets to take two forms: a narrowly drawn set of figures based on those measures most easily modelled and a wider analysis, using more assumptions, which would allow a fuller set of measures to be included. (Paragraph 82)


15.  The Committee recognises the problems faced by SMEs in raising credit. We will examine these issues as part of our future inquiries. (Paragraph 91)

16.  The Government has announced a consultation on the bank levy, and we will take evidence on the effect of the bank levy and other proposed changes in the UK and international regulatory system as soon as possible. (Paragraph 96)

17.  We recognise the Chancellor's willingness to reconsider the effect of his proposals in encouraging existing and potential share ownership schemes. We look forward to hearing from him on this before next year's Budget. (Paragraph 101)


18.  The Chancellor told us that he had built a degree of caution into the fiscal mandate by seeking to achieve it a year early. We welcome this as a signal that if economic conditions demand it he may be prepared to take measures to stimulate the economy, even if these delay the current plans for cutting the deficit. (Paragraph 104)

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