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New forecasts for the United Kingdom economy by economics consultancy Centre for Economics and Business Research (CEBR), show an upward revision in its forecasts for the UK economy compared with the previous forecasts released in January.
The forecasts show Gross Domestic Product (GDP) growth in 2010 of +1.2%, unchanged from January's forecast, but growth in 2011 of +1.3% compared with +0.8% predicted in January and in 2012 of +1.4% compared with +1.1% in the January forecast.
The new base forecasts incorporate the assumption of a Conservative victory in the 6 May 2010 election taking account of CEBR's traditional assumption of basing its political predictions on the bookmakers' views. Although the forecasts incorporate the key elements from the party manifestos, they also take account of the likely pressure from the bond markets to cut the budget deficit and so assume spending cuts and tax increases that are not in the party manifestos.
Despite the upward revision, CEBR's forecasts remain far below the Treasury's highly optimistic views for 2011 and beyond released in the Budget on 24 March 2010. The upward revision to the forecasts is based on the assumption of a more buoyant world economy, led by faster growth in the US, and by the assumption of a stronger reaction to devaluation than had earlier appeared to be likely.
Charles Davis, main author of the report and Senior Economist at CEBR, commented "the upward revision to growth should not be taken to imply that the pressure is off as far as public finances are concerned. Whoever wins power will have to take tough decisions, in our view at least 35 billion Pounds more fiscal action than was assumed in the March Budget."
The report also shows a simulation of the possible impact of a hung Parliament with a Labourâ€?Liberal Democrats coalition.
The forecasts assume that the bond market will force effectively the same scale of fiscal retrenchment whoever is in power.
But they also assume that a Labourâ€?Liberal Democrats coalition would mean 20 billion Pounds less in public spending cuts and 20 billion Pounds more in tax rises by 2015.
Over time the CEBR analysis suggests that the boost to lobbyists from a hung parliament would mean that the tax spending mix would continue to move towards higher tax and spend compared with the assumptions for a Conservative government.
Under the two scenarios, growth is much the same over the first 5 years, though slightly faster in the hung parliament case in the first 3 years. But in years 2015â€?2020, a low tax low spending government would reap the benefits, with economic growth running about +0.3% per annum faster. Obviously this type of economic modelling does not take account of what is a real possibility that the financial markets might react extremely negatively to a hung parliament and force much more draconian fiscal cuts than are currently envisaged.
CEBR estimate that, by 2020, GDP will be about 20 billion Pounds higher under the low tax scenario associated with a Conservative victory.