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UK's Brown likely to cut growth
LONDON, England (Reuters) -- Economists say taxpayers should not be much worse off after the British budget due on Wednesday, even though they expect growth estimates to be cut and public deficit forecasts to rise, according to a Reuters survey. Instead of hiking taxes, the British Treasury is expected to issue government bonds to cover the difference between higher spending and slumping revenues because of sluggish economic growth. All 18 economists in the survey taken April 3 and 4 said Britain's Chancellor of the Exchequer (finance minister) Gordon Brown will cut his gross domestic product growth forecasts for this year and 15 said he would axe the estimate for next year. Thirteen said he will raise his estimates of public sector net borrowing in fiscal year 2002/03 and 18 said Brown's borrowing forecast for 2003/2004 would jump. Ten said the budget, due to be announced at 1130 GMT on April 9, is likely to have a neutral impact on consumer spending, six said it would dampen demand and two said it would stimulate spending. "We expect a variety of small tax changes working in different directions, but no new tax changes of macroeconomic significance,'' said John Hawksworth at accountancy firm PwC. The mid-range of 18 responses shows economists expect Brown to cut his GDP growth forecasts to between 2.0-2.5 percent in 2003 and 2.5-3.0 percent in 2004, down from November's 2.5-3.0 percent and 3.0-3.5 percent respectively. They expect the forecast for public sector net borrowing requirement in 2002/2003 to rise to 22 billion pounds, up from the 20.1 billion pound estimate in November. He is expected to forecast borrowing needs for fiscal year 2003/2004 at 29 billion pounds, a jump from the previous 24 billion pounds. Iraq costsEconomists were split on whether Brown will be able to adequately factor into his forecasts the impact of the U.S.-led war in Iraq. Nine thought he could and nine said not. "The uncertainty is so great at the moment that any provision Chancellor Gordon Brown tries to make will probably be insufficient,'' said Mike Taylor at Merrill Lynch. "His growth forecasts made last November are hopelessly optimistic...since then the outlook has clearly deteriorated.'' Brown has made available three billion pounds to pay for Britain's involvement in the war in Iraq. If it drags for on for months, then it may not be enough. But even if he has to shell out more money, it will still only be a drop in the ocean of government spending. "It's not particularly substantial,'' said Ross Walker at RBS Financial Markets. "Especially if you look at it from the point of view of the more than 450 billion pounds of government spending every year.'' Brown is expected to announce that the hole in government finances will be plugged by extra borrowing in the gilt market -- about 90 percent, according to the mid-range of forecasts. "Last November when he announced higher government borrowing, the gilt market took it quite badly,'' said Taylor at Merrill Lynch. "I think they are expecting it this time...but obviously it's not good news.'' The definition of Brown's fiscal rule of only borrowing to invest is flexible enough to let him borrow the money he needs to fulfil his promises of extra spending to the National Health Services and education, economists said. Tax risesThe remainder of the deficit will probably be paid for by higher taxes on alcohol, tobacco, insurance, petrol and probably a freeze on personal tax allowances and income tax thresholds. There could be a hike in stamp duty on property transactions, but there were doubts about whether Brown would want to risk bursting the housing market bubble, which has supported consumer confidence, demand and growth since 2001. Last year, Brown announced big rises in national insurance contributions, which kicked off this fiscal year on April 6. Economists do not expect any hikes this year, but think they could be a target again in the future. Any tax rises that are announced will be very modest and are unlikely to further damage sentiment. "Brown hasn't got much room for manoeuvre,'' said Walker at RBS Financial Markets. "He will try to blame the war and the global economic slowdown...Having revised down growth forecasts in the near term, he'll use his old trick of revising up forecasts for 2005.'' Only three expect Brown to cut his GDP growth forecast for 2005, while 14 see a higher PSNB forecast for fiscal year 2004/2005, according to the survey.
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