However, you don’t have to flex these assumptions very much at all, to get a glimpse of a much more difficult fiscal environment. What if growth fails to remain at these levels? What if inflation fails to return to the Bank of England’s 2% target? In our view, these are both realistic concerns, so we have added what we believe are more realistic forecasts, using adjusted assumptions.
Between 2010 and 2014, the average real GDP growth delivered by the UK economy was 1.8% per annum. We have therefore incorporated this real growth rate into the adjusted model. Similarly, we see no reason to expect inflation to return to 2% per annum any time soon and have incorporated 1% per annum into this more realistic set of assumptions (indeed this may prove to be far too optimistic a view of inflation).
In doing so, we can see that, although the deficit continues to reduce, it does not do so at the same pace, nor does it end with a budget surplus by 2018-19. Indeed, this more realistic scenario results in a cumulative hole of over £120bn in the UK’s public finances.
We conclude that there is no room for complacency on the UK economy. We believe it is appropriate to be cautious about the UK economic outlook, as indeed we are about the global outlook. There was nothing in the Budget to warrant a change to this cautious view in the near-to-medium term.
On a brighter note, however, there were some very supportive initiatives designed to help the long-term development of the UK’s ‘knowledge economy’.
The Government aims to give the UK’s world-leading research institutions greater freedom in which to continue to develop cutting-edge technologies. It also wants to ensure that regulations do not restrict innovation and, in particular, the development of disruptive technology.
We passionately believe that it is through the development and commercialisation of new, disruptive technology that we can hope to break free from the post-financial-crisis economic stagnation that currently afflicts the western world. Any support for the knowledge economy should be welcomed as it allows a more optimistic view of our long-term economic prospects.