The U.K. economy is likely to avoid a technical recession and is seen expanding faster than expected earlier, Chancellor George Osborne said in his budget speech on Wednesday.
Osborne said the Office for Budget Responsibility (OBR) has revised up its growth forecast for the U.K. economy this year to 0.8 percent from the November estimate of 0.7 percent. The economy is seen expanding faster at 2 percent next year, 2.7 percent in 2014 and 3 percent in both 2015 and 2016.
"The situation in the euro area remains a major risk to our forecast", Osborne said citing the OBR. The agency also identified a "further spike in oil prices" as another risk for the outlook.
The U.K. economy is expected "to avoid a technical recession with positive growth in the first quarter" of this year and "carried a little more momentum into the new year than previously anticipated", the chancellor said.
The OBR expects unemployment to peak at 8.7 percent this year, before dropping each year to 6.3 percent by the end of the forecast period. However, the agency lowered its claimant count estimate and now expects it to be around 100,000 lower in each of the next four years.
It sees the figure to peak at 1.67 million, smaller than the November estimate of 1.8 million. The economy is also expected to add one million more jobs over five years.
Inflation is seen falling to 1.9 percent next year from 2.8 percent this year. Thereafter it is seen edging up to 2 percent by the end of the forecast period.
On the fiscal front, Osborne said the budget deficit is falling and is forecast to reach 7.6 percent next year. "Because we've taken difficult decisions, nor do we need to tighten further," he said.
"Over the five year period, this is a fiscally neutral Budget."
The chancellor lowered this year's borrowing estimate to GBP 126 billion, down GBP 1 billion from the earlier prediction. Borrowing is expected to fall to GBP 120 billion next year, excluding the transfer of Royal Mail pension assets. The figure is seen falling further to GBP 98 billion in 2013-14 and eventually reach GBP 21 billion by 2016-17. Public Sector Net Debt is expected to peak at 76.3 percent in 2014-15, almost 2% lower than previously forecast.
Osborne said lower borrowing costs for the U.K. reflect the confidence investors have in the country's ability to "pay its way". The Debt Management Office is exploring if there is scope for issuing gilts with maturities above 50 year, the longest term now, and the case for a 'perpetual' gilt with no fixed redemption rate, the chancellor said.
The chancellor also said the government is aiming for a simpler tax system to help businesses. He announced a reduction in the corporation tax by one percent to 24 percent starting next month. The rate is set to be reduced to 22 percent by 2014.
The rate of the bank levy was raised to 0.105 percent from next January. This is expected to bring in GBP 2.5 billion revenue.
The alcohol duty was left unchanged, while duty on tobacco products was raised, effective tonight. A new stamp duty land tax rate of 7 percent was also introduced on properties worth more than GBP 2 million.
The chancellor blamed the 50p top rate of income tax for causing massive distortions. As widely expected, the rate was reduced to 45p. Meanwhile, the personal allowance, which is the amount people can earn tax free, was raised by GBP 1,000.
by RTT Staff Writer
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