Growth pick-up gives Osborne “fiscal flexibility”

28 Jul 15

An increase in the UK’s economic growth rate is set to give Chancellor George Osborne greater fiscal flexibility in the run up to the Spending Review and Autumn Statement, analysts have said.

The Office for National Statistics today announced a preliminary UK growth rate in the second quarter of 2015 of 0.7%, higher than the 0.4% rate recorded for the first three months. Commenting on this, the Centre for Economics and Business Research predicted the Treasury was now likely to receive more than it had anticipated in tax revenue.

Scott Corfe, head of macroeconomics at the CEBR, said the new figures meant UK output was now forecast to rise by 2.6% this year, higher than the 2.4% forecast by the Office for Budget Responsibility. Consumer spending is expected to expand quicker, by over 3%, he highlighted.

“As with last year, the economy is likely to end up performing faster than the chancellor expected in March and we may well get some upward revisions to the current growth figures for this year. The ONS construction data continues to paint a more pessimistic picture than other sources such as business surveys suggest.”

This would all lead to higher tax receipts this year, he added, which would be good news for the government’s deficit reduction plan.

“The latest public finances release shows that, for the current fiscal year to date (April-June), VAT receipts are a strong 6.3% higher than a year ago, while taxes on income and wealth are 5.8% higher – also solid.

“The chancellor is on course to have some extra money to play with by the time of the next Autumn Statement and Budget – so expect some giveaways.”

According to the ONS, output increased in two of the main industrial groupings, with the service sector expanding by 0.7% and the production sector (including manufacturing) up by 1.0%. Output from construction was flat, while agriculture decreased by 0.7%.

Azad Zangana, senior European economist at asset management firm Schroders, said the preliminary growth estimate showed the UK economy had rebounded in the second quarter, following a disappointing start to the year.

“Overall, the latest GDP figures suggest that the economy is performing strongly and should continue to create more jobs, putting upward pressure on wages. We forecast the pace of growth to remain similar until the turn of the year, before austerity starts to slow activity.”

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