EY ITEM Club. Budget preview. March 2015

Transcription

1 EY ITEM Club Budget preview March 2015

2 Contents EY is the sole sponsor of the ITEM Club, which is the only nongovernmental economic forecasting group to use the HM Treasury model of the UK economy. Its forecasts are independent of any political, economic or business bias. EY s view 2 EY ITEM Club Budget Preview 6 An upward revision to the 2015 growth forecast looks likely 8 and the public finances may also appear in a better light 10 Lower inflation and gilt yields should again come to the Chancellor s aid 11 with the borrowing forecasts set to come down by around 10bn by But this fiscal windfall is unlikely to translate into any sizeable giveaways 13 although it will make the fiscal equation less daunting for the next government 14 EY 1

3 EY s view

4 EY s view Business implications Mark Gregory EY Chief Economist With the General Election looming, the EY ITEM Club believes a caretaker Budget is the most likely scenario. However, the Chancellor s statement should still contain some positive news. With projected tax receipts rising and interest rates on Government debt falling, the Chancellor should be able to announce a reduction of just over 2 billion in the OBR s borrowing forecast for the current year. Add to that the possibility of a 6 billion reduction for the following year, and it s hard to imagine any Chancellor could resist playing up these positive developments. Beyond this, however, it s unlikely the Budget statement will include a significant number of major policy initiatives. While the Chancellor may pull one or two rabbits out of his hat, the politics of a coalition close to an election are likely to limit his room for manoeuvre. So perhaps the most important role played by this Budget will be to kick off the fiscal policy debate for the next Parliament. In my view, understanding this debate is what business should be focusing on. However, this is made harder by uncertainty over the medium-term outlook. Paul Johnson of The Institute for Fiscal Studies commented recently that the gap between the fiscal plans of the two largest UK political parties is as wide as it has been since The Conservative Party wants to eliminate the entire government deficit and run a small surplus during the next Parliament. Labour is aiming only to balance the current budget, defined as current government spending excluding capital investment. With the election outcome very much in the balance, these contrasting fiscal goals bring sharply differing implications for spending cuts and/or tax rises. Despite this uncertainty surrounding public finances, UK business seems to know what it wants. A recent Financial Times survey of business leaders found strong support for deficit reduction before the end of the next parliament, with 39% wanting this achieved wholly through spending cuts. Asked where the cuts should fall, 84% wanted welfare spending reduced, while 54% wanted an end to the NHS ring-fence. However, 90% wanted an increase in the capital spending budget of more than the planned 2%. Economics for Business EY provide economic insight and analysis to help businesses understand the economic environment in which they operate both in the UK and in the context of the global economy. To read our latest economic reports visit our website: ey.com/uk/economics Follow us on Follow our Economics for Business blog: markgregoryeconomics.ey.com Subscribe to our EY UK&I Economics for Business YouTube channel EY 3

5 EY s view The overall message seems to be that business wants lower public spending, except in selected areas that presumably benefit business. However business should be careful what it wishes for, since the benefits may flow in complex ways that are not obvious from the headline numbers. For example, Kevin Farnsworth of the University of York has calculated that socio-corporate welfare and corporate welfare may have delivered around 85 billion of taxpayers money in benefits to the corporate sector in There is also research supporting the view that public sector funding of Research & Development can bring major benefits for the private sector. And even the potential impact of welfare spending is not that straightforward: around 47% of benefits accrue to pensioners and cutting this could well reduce consumer spending, impacting businesses. Yet protecting pensions might mean cutting support for lower-income workers, affecting sectors such as hospitality. Government finances are a complex area. When listening to politicians, it s easy to believe the choices are straightforward. The reality is very different especially when policy differs between the parties to the extent it does today. Business must get to grips with the detail, and plan accordingly. EY 4

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8 Highlights Highlights The OBR s new forecasts are likely to provide plenty of cheer for the Chancellor, who will be able to trumpet upgrades to the economic forecasts and downgrades to the borrowing projections. However, the signs are that the coalition partners are unlikely to be able to come to any agreement on any substantive policy changes. Therefore, we expect this to mean that the forecasts just show lower borrowing and ultimately larger surpluses through the forecast horizon, with any major policy decisions deferred until after the election. The oil price has fallen sharply since the OBR published its December forecast, with the new projections set to be made using an assumption which is around $13 a barrel lower across the forecast horizon. With this resulting in a substantial boost to household spending power, it should enable the OBR to upgrade its forecast for GDP growth in 2015 from 2.4% to closer to 3%, although historical revisions mean that the 2014 outturn is now a little weaker than the OBR had anticipated. While growth now looks set to average 1.9% a year across the current parliament, a substantial upgrade on the 1.2% forecast in Budget 2013, it is still well short of the 2.7% a year that the OBR had forecast at the start of the parliament. Recent revisions to the public finances data have been very favourable to the Chancellor and we expect the OBR to revise down its forecast for borrowing in from 91.3bn to around 89bn. Tax revenues look set to overshoot the December forecast, with VAT revenues performing particularly well, as consumers make use of their additional spending power. Spending on debt interest payments may also be lower over the latter months of , reflecting the impact of low inflation on the cost of servicing index-linked gilts. The OBR is also likely to revise down its borrowing forecasts for the remainder of the forecast horizon. We expect them to rule that the current year s stronger revenues represent a structural, rather than cyclical, improvement, meaning that they will persist through the medium-term. Furthermore, the collapse in the oil price should be a net positive for the public finances, while lower inflation and the recent downward shift in the forward curve for gilts both point to a lower forecast for debt interest costs. We estimate that in the absence of any policy changes the OBR could revise down its forecast for borrowing by around 6bn for next year, with the benefits continuing to gradually accumulate so that by , the final year of the forecast, the surplus is 10bn higher than at the time of the Autumn Statement. Under normal circumstances, the Chancellor would be expected to spend the 6bn fiscal windfall that we expect to see for next year. As a point of comparison, one penny off of the 20% basic rate of income tax would cost around 4bn. Alternatively, a 1,000 rise in the tax free personal allowance (which is already due to increase from 10,000 to 10,600 this April) would cost around 5.2bn. And 4bn would finance a 1,500 rise in the current 7,956 threshold above which employee NICs are paid, narrowing the gap with the personal allowance. However, we think it very unlikely that the Chancellor will be able to spend this fiscal windfall. Any policy changes would need to be agreed by both parties in the coalition but, with the General Election just around the corner and the two parties seeking to appeal to very different groups, the chances of them coming to an agreement on any substantive changes of policy would appear to be low, particularly given they are likely to want to save popular policies for their respective election manifestos. This means we are likely to see something of a caretaker Budget which just keeps things ticking over until after the election, when any big decisions will be made. However, if the fiscal windfall is banked in this way then it will mean that the fiscal equation is a little less daunting for the next government, with all parties able to achieve their borrowing targets with less fiscal tightening than previously thought. EY 7

9 EY ITEM Club Budget Preview EY ITEM Club Budget Preview With the General Election campaign about to go into overdrive, this week s Budget represents a key opportunity for the two coalition parties to use economic and fiscal policy to try to gain votes. This Special Report starts by looking at where the Office for Budget Responsibility (OBR) may make changes to its forecasts, which will be published alongside the Budget, to assess the scope for the government to make some giveaways. We then move on to assess what the Chancellor might choose to do. An upward revision to the 2015 growth forecast looks likely Typically the OBR s Budget forecast is little changed compared with the one published alongside the Autumn Statement, given the relatively short amount of time between them and the fact that the largest ONS data revisions tend to come alongside the Blue Book in the summer. However, this time around there is more scope for revisions because of the collapse in the oil price around the turn of the year. The OBR s December forecast was based upon an average oil price of just over $100 a barrel for , with it then following futures prices over the following two years to settle just above $85. However, with the oil price having fallen sharply through December and early-january, the average is now looking likely to be around $86. Furthermore, the futures market is now saying that the price of Brent crude oil will be $64 in , around $19 lower than the December projection, and $70 in If the OBR follows its previous convention of assuming that the oil price remains flat over the last three years of the forecast horizon, this would mean that its forecasts are based upon a medium-term assumption which is around $13 per barrel lower than in December. UK: Oil price forecasts $ per barrel Source : OBR, Bloomberg OBR (AS14) Futures price - 10 days to 6th Mar Forecast based on previous OBR convention The recent historical revisions mean that the outturn for GDP growth in 2014 (2.6%) is a fair bit UK: CPI inflation weaker than the OBR thought it would be (3.0%). % year 6 However, such a large revision to the oil price Forecast assumption promises a sizeable upward revision to 5 the outlook moving forwards. As we emphasised in our January forecast, 1 the lower oil price is important not just because of the impact on petrol 4 3 prices. It has more widespread effects because transportation costs represent a sizeable proportion of many firms input costs, which means 2 1 that the benefits are felt across a much wider range of goods and services than just petrol. With domestic energy bills and food prices also coming down in recent months, CPI inflation is likely to average just below zero this year, which should Source : EY ITEM Club provide a major boost to real household disposable income. It will also help to stay the hand of the MPC on interest rates. This has led to a downward shift in the forward curve for the 3-month interbank rate and, with the OBR set to adopt this lower profile, this will also point to stronger consumer spending growth over the next couple of years. 1 EY ITEM Club Winter forecast, January 2015, full-report.pdf EY 8

10 EY ITEM Club Budget Preview The latest high frequency data confirm that this dynamic is beginning to play out, with the economy enjoying some renewed momentum, so we expect the OBR to revise up its forecast for GDP growth in 2015 from 2.4% to something closer to 3%. Two successive years of growth in the 2½-3% range would give the Chancellor ample ammunition to trumpet his piloting of the economy. UK: Comparison of GDP forecasts % year 3.5 ITEM Club (Jan) OBR (Dec) HMT consensus (Feb) As ever, the chances of any revisions to the forecasts for subsequent years are a lot lower and 1.0 would be dependent upon the OBR changing its 0.5 view of the supply potential of the economy. But in this respect, a 2014 report 2 by HM Revenue & 0.0 Customs and HM Treasury provides cause for optimism. This found that the reduction in fuel duty Source : EY ITEM Club, OBR, HMT over the current parliament, which equates to around 20% in real terms relative to the plans inherited by the government, are likely to have increased GDP by between 0.3 and 0.5% over the long-term. Though the report looked specifically at fuel duties, rather than the oil price, given that both would cause a reduction in the retail petrol price, the implications should be similar. Indeed, the impact of the decline in the oil price since last summer on the retail petrol price has been of a comparable size to the fall in fuel duty analysed in the HMRC/HMT study so, all other things being equal, we should expect the long-term GDP forecast to be revised up by around ppt compared with Budget However, with unemployment having fallen further over recent months, the OBR may seek to temper any increase in their estimate of the size of the current output gap, which past experience suggests would also lead them to take a more cautious view of potential output. Were the OBR to revise up its forecast for 2015, it would continue the recent pattern of upgrades to the assessment of the UK s growth performance over the parliament. Admittedly, a large chunk of the upgrades made at the time of the Autumn Statement reflected substantial methodological changes and historical revisions. But there has been a clear upward trend in the forecasts, with growth for the period now on course to average 1.9% a year, up from 1.2% in the forecast made at the time of 2013 Budget. However, this still falls a long way short of the OBR s first forecast of this parliament made in June 2010 which projected average annual GDP growth of 2.7%. 1.5 UK: OBR forecasts for GDP growth Rebased, 2008= ITEM Budget14 Budget13 Budget12 Budget11 Budget Source : OBR, EY ITEM Club UK: OBR forecasts for GDP growth, Average annual growth rate Budget10 Budget11 Budget12 Budget13 Budget14 ITEM Source : OBR, EY ITEM Club This shortfall appears to be a function of both factors outside of the UK s control most notably the Eurozone crisis but also an underestimation of the degree to which fiscal tightening would weaken 2 Analysis of the dynamic effects of fuel duty reductions, HM Revenue & Customs and HM Treasury, April _duty_reductions.pdf EY 9

11 EY ITEM Club Budget Preview growth. This growth shortfall is the key factor which explains why the period of fiscal tightening is now expected to span two parliaments, rather than one. and the public finances may also appear in a better light The OBR may also have some good news for the Chancellor in terms of the public finances, due to two factors. Firstly, the ONS has made some substantial downward revisions to the historical data for the current fiscal year, which suggests that borrowing is on track to undershoot the OBR s December forecast. And secondly, lower inflation and lower gilt yields are likely to reduce the projections for government spending throughout the forecast horizon. Recent revisions to the public finances data have been very favourable to the Chancellor and the latest data now suggest that over the first ten months of the fiscal year , Public Sector Net Borrowing excluding public sector banks (PSNB) was 6bn lower than in The OBR had forecast that borrowing would fall by 6.2bn over the year as a whole, so only a marginal improvement on last February and March is required to bring in borrowing on target. UK: Public sector net borrowing* But there is good reason to expect borrowing to come in a little lower still. Though they are due at 10 0 the end of January, revenues from self-assessment Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar are typically spread over January and February and Source : Haver Analytics this February s take could be particularly large for two reasons. Firstly, the payments relate to the tax year, when many high earners were thought to have taken income they had deferred from the previous year to benefit from the cut in the top rate of income tax. That January s revenues were 16% higher than a year earlier, would appear to confirm this notion. Secondly, this year s deadline for tax returns fell on a Saturday, so the traditional rush to file is likely to have resulted in a greater proportion of returns falling into February than would normally do. bn * excluding public sector banks Cumulative position OBR forecast HMRC tax revenues, year-to-date and projections for billions Outturn, Apr-Jan projection Difference OBR ITEM Difference Income tax, NICs and CGT Value added tax Corporation tax Petroleum revenue tax Fuel duties Inheritance tax Stamp duties Tobacco duties Alcohol duties Other duties & levies Total HMRC Source: HMRC, OBR, EY ITEM Club EY 10

12 EY ITEM Club Budget Preview Furthermore, a look at the monthly data for revenues collected by HMRC suggests some upside potential for revenues, most notably VAT receipts, which appear set to come in some way ahead of schedule. This largely reflects the very strong retail sales performance at the end of last year, with consumers enjoying the benefits of the lower oil price and the recent pickup in nominal wage growth through improved spending power, which they are using to ramp up spending on a range of goods and services. We expect this to result in VAT receipts coming in around 2bn above the OBR s December forecast. With some of the smaller taxes also on course to come in a little higher, we expect the OBR to revise up its forecast for HMRC revenues by around 2.3bn (see table on the previous page). It is also possible that the OBR will revise down its projections for government spending in the current year. Though central government current spending increased by 1.4% over the first ten months of the fiscal year, a little ahead of the OBR s full-year forecast of 1.3%, the sharp drop in inflation will mean that the cost of servicing index-linked gilts will be somewhat lower in the remaining two months of the year than had been expected. This may lead the OBR to nudge down its spending forecasts. Overall, we expect the OBR to revise down its forecast for borrowing in by just over 2bn, talking it to 89bn. Lower inflation and gilt yields should again come to the Chancellor s aid At the time of the Autumn Statement, the OBR had given the Chancellor an early Christmas present by making substantial downward revisions to its medium term forecasts for debt interest costs, thus giving him a little extra fiscal headroom. We believe that developments in financial markets over the past three months could offer Mr Osborne another boost alongside the Budget. As we have already established, the collapse in the oil price promises to provide a substantial boost to UK economic growth over the coming year. But it will also have a positive impact on the public finances, which we discuss in detail in the box over the page. However, it is not just the oil price which has shifted considerably since the Autumn Statement. Financial markets have become more bearish about the outlook for interest rates which, in turn, has pulled down forward rates for gilt yields by 40-50bps since the December forecast was produced. The OBR s ready reckoner suggests that such a difference in gilt yields should lower the UK s debt interest costs by just over 2bn by , with the benefits steadily accumulating through the forecast period. UK: Forward curve for government bond yields % But it is not just lower gilt yields which offer the 1.7 Forward curve - 10 days to 6th Mar promise of lower debt servicing costs. We now 1.5 expect RPI inflation to average just under 1% in fiscal year , well below the OBR s Source : OBR, Bloomberg December forecast of 2.1%. Such a large downward revision should result in a substantial reduction in the OBR s projection for the cost of servicing index-linked gilts. As with the impact of lower gilt yields, the benefits steadily accumulate through the forecast horizon, but we estimate that lower inflation could reduce spending by just under 5½bn in OBR (AS14) EY 11

13 EY ITEM Club Budget Preview The impact of a lower oil price on the public finances While the sharp drop in the oil price will deliver a broad-based set of benefits to the economy, it will hit tax revenues from the North Sea sector. However, once indirect effects are accounted for, the lower oil price could well deliver a small positive boost to the public finances. In terms of the direct fiscal consequences of the fall in oil prices, there is simply not that much money at stake. The North Sea had become a relatively insignificant source of revenues well before the recent drop in the price of crude oil. The UK has come a long way from the heady days of the mid- 1980s, when booming output, high sterling oil prices and hikes in tax rates resulted in oil and gas receipts accounting for 8% of the public sector tax take. But in the five years to , that share averaged only 1.2%. UK: North Sea revenues That said, risks to the 4.7bn of tax revenues generated by oil and gas production in are not immaterial in a fiscal environment where the budget deficit is falling at a slow pace. The OBR s Source : EY ITEM Club/OBR 1 0 Autumn Statement forecast predicted that those revenues will drop to a mere 2.2bn in , before seeing a modest recovery to around 3bn by the end of the decade. And that forecast was based on an assumption for oil prices ($100.6 per barrel in and $83-$86 over the following five years) that current and forward prices suggest will prove to be too high. However, in practice, there are also a number of channels through which a lower oil price will bolster the public finances: Lower pump prices will raise the demand for fuel and so increase revenues from fuel duty, since duty is charged on a pence per litre basis. Temporarily lower inflation resulting from cheaper oil will push down the indexation of tax thresholds, benefits, public service pensions and index-linked gilts. Lower oil prices should boost real household incomes and the supply potential of the economy, with positive effects on income tax receipts, (on-shore) corporation tax, and VAT via higher consumer spending. If the fall in the oil price discourages companies from undertaking investment in the North Sea, their scope to claim capital allowances (which, for oil producers, allow 100% of investment spending to be written off against tax) will be reduced. Overall, the OBR estimated that in the event of a temporary one-year reduction in the price of oil, the net effect on the public finances should be broadly neutral in year one. A positive effect should emerge in the second year, amounting to around 0.7bn for every 10 fall in the price of the oil, with the beneficial effect on receipts from higher output more than offsetting the detrimental impact on UK oil and gas revenues. 3 The OBR s analysis was produced back in 2010, since when North Sea production (and associated tax receipts) has fallen sharply, from 2.2m barrels a day in 2010 to 1.44m in This implies the net fiscal effect of a temporarily lower oil price is likely to be even more favourable now. So the 30 or so drop in the price of oil since summer 2014, if sustained during 2015, might eventually deliver a net fiscal boost to the Exchequer of around 2.5bn. bn Share of total current receipts (%, RHS) Revenue ( bn, LHS) OBR Forecast % Office for Budget Responsibility, Assessment of the Effect of Oil Price Fluctuations on the Public Finances, September 2010 EY 12

14 EY ITEM Club Budget Preview Lower inflation will also create some interesting dynamics in other areas of government spending. The September inflation figures are used to uprate many benefits and the OBR had previously expected the September 2015 CPI and RPI readings to come in at 1.2% and 2.1% respectively. However, we now expect these forecasts to be revised down to just 0.0% and 0.9%. Those receiving the state pension will benefit handsomely from the triple lock, which will ensure that their pension still rises by 2.5%, or possibly more if earnings growth continues to accelerate and moves above 2.5% by September. By contrast, public sector pensions do not enjoy these protections, so with CPI inflation likely to be zero they are set to be frozen in cash terms this would represent a sizeable saving for the Exchequer. Rather fortuitously, the government s three-year 1% uprating of most working age benefits is due to come to an end in ; had it extended to , the government would have been faced with its 1% rise being much higher than an uprating by CPI inflation. with the borrowing forecasts set to come down by around 10bn by If we assume that the additional revenues from the current year will be treated as a structural, rather than cyclical, improvement which would appear to be a reasonable assumption given that the recent revisions from the ONS mean that GDP growth looks like coming in at 2.7%, rather than 3% - then this should also persist throughout the forecast horizon. Therefore, adding on the various factors identified above means that in the absence of any policy changes the OBR could revise down its forecast of borrowing by as much as 6bn for , with the difference then gradually climbing until it reaches 10bn by , the final year of the forecast. UK: Public Sector Net Borrowing* But this fiscal windfall is unlikely to translate into any sizeable giveaways In a world without political complications, the Chancellor would be expected to use the 6bn windfall that we expect in to finance some eye-catching measures, while accepting that the larger undershoots forecast for later years are less certain and therefore cannot be banked just yet. A windfall of this magnitude could allow the Chancellor to resurrect what used to a staple of giveaway Budgets a cut in the basic rate of income tax. One penny off of the 20% basic rate would cost around 4bn. Alternatively, a 1,000 rise in the tax free personal allowance (which is already due to increase from 10,000 to 10,600 this April) would cost around 5.2bn. If there was a desire to focus any extra support on the lower paid, then rather than implement above-inflation increases in the personal allowance Mr Osborne could focus on employee National insurance contributions (NICs). Changes made by both the previous and current governments have moved the UK from a situation where the income tax personal allowance and National Insurance primary threshold were broadly aligned to one where the primary threshold is significantly lower than the personal allowance. As such, there is a sizeable chunk of workers who are not paying income tax but are paying some employee NICs. 4bn would finance a 1,500 rise in the current 7,956 threshold above which employee NICs are paid, narrowing the gap with the personal allowance. Should the government wish to bring the starting point for employee NICs into line with next year s personal allowance of 10,600, this would cost almost 7bn. However, even if the OBR s forecast offers the fiscal headroom for giveaways, the Chancellor s Budget statement is likely to lack much in the way of significant announcements. One reason relates to the Budget s timing. The coalition between the Conservatives and Liberal Democrats is set to come to an end on 30 March, when Parliament is dissolved and the general election campaign begins. Moreover, the Budget on 18 March will occur only 50 days before Election Day itself. Any policy measures announced in the Budget would have to be agreed between the coalition partners, but the likely desire of both parties to save popular policies for their respective election manifestos could deny the Chancellor s statement much in the way of meat. bn * excluding public sector banks Forecast ITEM OBR Source : EY ITEM Club, OBR, ONS EY 13

15 EY ITEM Club Budget Preview This could be true even in areas where there is common ground between the coalition partners, for example on the desirability of further rises in the tax-free personal allowance. This is because each party might worry that the other would take much of the credit for any policy change. This means we are likely to see something of a caretaker Budget which just keeps things ticking over until after the election, when any big policy decisions will be made. But even if more fundamental reforms are ruled out by politics, the Budget will not be completely bereft of measures. Given the difficulties currently facing the North Sea sector from the plunge in the price of oil, quick action to bolster UK oil producers looks likely. Having used December s Autumn Statement to take two percentage points off the supplementary charge paid by North Sea producers on top of the standard rate of corporation tax, Mr Osborne could cut the current 30% rate further. That said, having raised the supplementary charge by 12 percentage points in his 2011 Budget, the Chancellor may have to go a long way to provide significant succour to UK oil producers. But with each percentage point off the charge costing the Exchequer a modest 30m or so, even a sizeable cut would be fiscally manageable. A near-term reduction in the supplementary charge may be accompanied by a broader reform to the North Sea fiscal regime, possibly including a simplification of the current complex system of bespoke tax rates on different fields by moving towards a basin-wide investment allowance. although it will make the fiscal equation less daunting for the next government If the fiscal windfall is banked, and the surplus merely gets larger, then it will mean that the fiscal equation is a little less daunting for the next government. In particular, it would permit all parties to achieve their fiscal goals with less fiscal tightening than previously thought. In the Autumn Statement, the OBR forecast that total public spending would grow by an annual average of only 1.1% from to , only half the 2% rate seen in the preceding five years and a fraction of the 7.1% annual average growth from to That projection was based upon the next government running a sizeable budget surplus by the end of the parliament. But if the new administration were to merely aim to balance the budget, the cumulative fiscal improvements that we expect the OBR s Budget forecast to reveal mean that public spending in could be as much as 33bn higher than current plans ( 813bn vs 780bn). This would equate to a total rise of 10% over the next Parliament, compared to the 6% currently pencilled in. While Mr Osborne is unlikely to go so far in backtracking on spending reductions, some easing of the planned fiscal squeeze could go some way to neutering the Labour party s claim that a Tory government would see public sending as a share of GDP cut back to the level of the 1930s. Our analysis of the impact of the lower oil price also suggests that fuel duty increases could move back onto the agenda in the next parliament. The Chancellor has committed to freezing fuel duty until September, but theoretically with the oil price now well below the $75 trigger price, the government s fair fuel stabiliser will cease to be effective and the fuel duty escalator which uprates duty by RPI inflation plus 1% - should kick in again. Given that UK consumers have become accustomed to duty being frozen, reintroducing inflation-linked increases could be politically unpopular. However, with petrol prices now much lower than before, there is little economic justification for continuing to keep duty frozen and raising duty may well be seen as a more politically palatable alternative to larger cuts in government spending. EY 14

16 EY Assurance Tax Transactions Advisory Ernst & Young LLP About EY EY is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. EY refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit About ITEM Club The ITEM Club is the only non-governmental economic forecasting group to use the HM Treasury s model of the UK economy. ITEM stands for Independent Treasury Economic Model. HM Treasury uses the UK Treasury model for its UK policy analysis and Industry Act forecasts for the Budget. ITEM s use of the model enables it to explore the implications and unpublished assumptions behind Government forecasts and policy measures. Uniquely, ITEM can test whether Government claims are consistent and can assess which forecasts are credible and which are not. Its forecasts are independent of any political, economic or business bias. The UK firm Ernst & Young is a limited liability partnership registered in England and Wales with Registered number OC and is a member firm of Ernst & Young Global Limited Ernst & Young LLP, 1 More London Place, London, SE1 2AF. ITEM Club Limited Published in the UK. All Rights Reserved. All views expressed in EY ITEM Club special report on the labour market are those of ITEM Club Limited and may or may not be those of Ernst & Young LLP. Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive or sufficient for making decisions, nor should it be used in place of professional advice. Neither the ITEM Club Limited, Ernst & Young LLP nor the Ernst & Young ITEM Club accepts any responsibility for any loss arising from any action taken or not taken by anyone using this material. If you wish to discuss any aspect of the content of this newsletter, please talk to your usual Ernst & Young contact. This document may not be disclosed to any third party without Ernst & Young s prior written consent. Reproduced with permission from ITEM Club Limited