Fiscal outlook

The central forecast for the following five years is that public sector net borrowing (PSNB) will decline as a share of national income. Net borrowing this year - which at one point was forecast to be £165 billion, will be in the region of £148.5 billion.

Forecasting government revenues is fraught with difficulty as this depends on so many other inter linked assumptions, e.g. will spending patterns change? (VAT); will employment increase? (income tax and national insurance) will corporate profits increase? (corporation tax). While the government has announced increases in taxation and cuts in public spending, national debt continues to increase year on year and with it the cost of interest.

Receipts £000bn Payments £000bn Deficit £000bn 2010/11 549.7 698.2 148.5 2011/12 586.2 703.7 116.5 2012/13 620.3 711.3 91.0 2013/14 659.1 719.3 59.8 2014/15 698.0 733.0 35.0 2015/17 734.6 752.9 18.3

A few of the assumptions on which the forecasts are based:

Equity prices

Equity prices are assumed to rise from their present levels in line with GDP growth. Notwithstanding this assumption the report acknowledges that these are volatile and unpredictable. Given that observation this is a reminder that events external to the UK (oil prices, events such as 9/11, prospects of war (Korea)) can so easily destabilise our country's finances which are already in a fairly precarious state.

Financial sector profits

It is assumed that profits rise at 5 per cent over the period to 2015/16.

Residential property prices

It is assumed, based on the median of independent forecasts that property will increase by 1.7 per cent for 2010 and a 1.4 per cent decline in 2011.

Commercial property prices

Forecast for 2010/11 is 6 per cent and 2011/12 - 13 per cent. Thereafter from 2012/13, transactions are expected to grow by around 3.5 per cent to 4.5 per cent.

Oil prices

It is assumed that these will move in line with the prices implied by the futures markets.

Interest rates

Short term interest rates are assumed to move in line with market expectations.

Receipts

Income tax and national insurance contributions

These are expected to grow from £249.5 bn (2010/11) to £337.2 bn (2015/16). This forecast takes into account reducing unemployment, increases in the  income tax yield at the 40 and 50 per cent rates and national insurance which in April increases on a combined basis from 23.8 per cent to 25.8 per cent.

Self assessment receipts are expected to fall this year and will be held back by growth in wages and salaries that is below overall growth in nominal GDP.

VAT

Not surprisingly VAT receipts are forecast to grow. The forecast is for 15 per cent growth in 2010/11 rising to 16 per cent growth in 2011/12. While assumptions of growth in tax receipts are normal, what the forecasts do not consider is the possibility that all the underlying forecasts comprising the OBR updates may be superseded by unexpected events. For example, what happens if:

• Other Euro countries need a bail out?
• Public employees may opt for saving in the event that it may be them who are made redundant anytime between now and December 2014
• The country is hit by rounds of strikes
• Oil costs are forced up by OPEC
• Energy and food costs increase beyond inflation
• People continue to save more to secure a better future
• People do not borrow and spend as much as has been the case in the past. (Note that unsecured household debt peaked in August 2008 and has subsequently reduced)

These events could cause people to spend less on VATable goods with a consequent need to reduce the expected tax yield - and an increase in the public deficit

Corporation tax

Against a background of reducing rates of corporation tax it is nevertheless forecast that corporation tax receipts will increase from £35.8 bn this year to £48 billion in 2015/16.

UK Oil and gas revenues

As a result of the increase in the cost of a barrel of oil by $18 the tax revenues increase by about 40 per cent. Forecasts for the following five years show peak revenue of £9.8 bn (2011/12) reducing in 2015/16 to £7.7 bn as oil field production declines.

Capital gains tax

These have for many years been almost irrelevant in terms of the total tax yield. Notwithstanding the concern that many of our clients experience in planning to avoid these taxes. In 2009/10 the yield from capital  gains tax is expected to be about £2.8 billion

Expenditure

Social security

This represents a cost that has risen dramatically in recent years and as such now includes a considerable proportion of hard core cost that can only be reduced by reducing benefits. Social security increased in real terms by 8 per cent in 2009/10 alone.

Job seekers allowance and other employment related benefits will wax and wane with the economy while others can only be reduced or eliminated by changing the rules, restricting increases, capping benefits and so on. The cost of social security in 2010/11 is estimated at £169 bn and, in spite of the headlines, this is estimated to increase to £188.1 bn by 2015/16. Thus these forecasts serve as a reminder that government is mostly cutting down on increases as opposed to reducing the total cost.

Changes in jobseeker's allowance, employment and support allowance and state retirement pension will serve to reduce the cost of benefits in real terms.

EU contributions

While there are those who would like to see the UK withdraw from the European Union we must, [until that event, if ever, occurs], continue to contribute toward the cost of Europe. No budget for 2011 has yet been agreed but the cost will be somewhere greater than the 2010/11 cost of £8.4 billion.

Debt interest

The cost in the current year is £26.7 bn and is expected to increase to £32.4 bn by 2015/16.

Factors impacting the cost of interest include:

• The amount of debt outstanding
• The size of the Central Government Net Cash Requirement (CGNCR)
• The size and nature of gilts redeeming over the forecast period

• The forecast if the various debt interest rates

• The RPI inflation forecast; and

• The mix of financing instruments expected to be used

What happens to the underlying cost if base rate increases from 0.5 per cent to say, 3 per cent?

Student loans

Currently student loans cost £4.1 bn (2010/11). This cost is due to increase to £10.7 bn by 2015/16 as the cost of student fees is passed onto the students. The fact that students are being asked to contribute more does not change the reality that the cash has to be given as a loan - instead of a cost of funding the actual university.