Austerity is for real in 2011

Paul Boughton
Commenting on today’s UK budget, Andrew Smith, Chief Economist at KPMG in the UK, said: “Last year was the preview, this year austerity is for real with tax rises and spending cuts each of 1 per cent of GDP. Today’s concessions are small beer by comparison with this squeeze.

The surprise was the cut in fuel duty – financed by the North Sea supplementary charge - aimed at the headlines but nevertheless still welcome to struggling consumers.

You have to remember we are in uncharted policy waters with effectively zero interest rates. The Chancellor’s strategy relies on monetary policy remaining loose to offset the tight fiscal stance - but this is outside his control and the MPC is becoming increasingly concerned about above target inflation.

And unfortunately for Mr Osborne, it is the wrong kind of inflation - which is pushing up government spending faster than receipts. Combined with a lower profile for growth in the short-term, there is already some slippage in the deficit reduction programme before it has really begun.

Without being able to pull the fiscal demand levers, this “budget for growth” is relying on low-cost measures designed to improve the working of the economy. While welcome, supply-side improvements are no quick fix and take time and persisitence to come to fruition.

The fall in fourth quarter output has had a knock-on effect on the economic forecast for this year and next, but growth is projected to get back on track further out. To date, though, there is little evidence of the promised rebalancing of the economy. Consumer spending is certainly taking a back seat – this year’s forecast increase has been halved - but exports and business investment have yet to take off.  A triumph of hope over experience?“

KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and operates from 22 offices across the UK with nearly 11,000 partners and staff.  The UK firm recorded a turnover of £1.6 billion in the year ended September 2010. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. It operates in 150 countries and have more than 138,000 professionals working in member firms around the world.

For more information, visit

Recent Issues