By Richard Johnstone | 7 February 2014
The government is on course to meet its target to take the public finances into the black by the end of the next parliament, the National Institute of Economic and Social Research said today.
According to the institute’s latest analysis, the UK economy will grow by 2.5% in 2014 and 2.1% in 2015. Growth above 2% is then expected every year to the end of 2018, the report stated, helping to move the public finances into a £5.4bn surplus in 2018/19, in line with Chancellor George Osborne's target.
Tax receipts will grow from £588.6bn in 2012/13 to £770.6bn in 2018/19, the Prospects for the UK economy report stated. Although current government spending will increase in cash terms from £652.8bn in 2012/13 to £711.4bn in 2018/19, the annual percentage increase will be smaller than the economic growth rate. As a result of what the report called a sharp squeeze on government consumption, current public sector expenditure will fall by more than 6 percentage points as a proportion of GDP over the period – from 41.4% to 35.2% – leading to the first surplus since 2001.
The report also predicted the unemployment rate will soon drop below the 7% level at which the Bank of England has said it would consider increasing interest rates from the current historic low of 0.5%
This ‘surprisingly rapid fall’ in unemployment has raised questions over the credibility of the Bank of England’s forward guidance, which linked the likelihood of interest rate rises to the unemployment rate, the report stated. When it was first issued last August, the Bank projected unemployment would not fall below the 7% level until 2016.
‘It remains unclear how this will be resolved,’ the report authors stated. ‘We have brought forward the point at which we expect interest rates to rise in the second quarter of 2015, although this is still more than a year after a breach of the unemployment threshold is expected.’
