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)
Macroeconomy
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)
Welfare
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)
Business
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)
Conclusion
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)
| 
