The ICAEW (Institute of Chartered Accountants in England and Wales) has warned that the government still have a deficit when the current Parliament comes to an end in 2020.
In his Summer Budget, the Chancellor George Osborne revealed a longer timeline for deficit reduction. In the Budget earlier in the year, Mr Osborne forecast government accounts showing a surplus of around £7 billion by 2018/19. But a surplus is now not expected until 2019/20.
On that timescale, the ICAEW believes that increase interest rates would have a knock-on effect on the economy and push back the surplus even further, into the next Parliament. Initially, the Conservatives had pledged to eliminate the deficit by the end of the previous Parliament, which ended this year.
ICAEW chief executive, Michael Izza said: "We’re not exactly booming, and there’s certainly plenty of areas of the economy that are holding us back. We could do so much better, especially when it comes to exporting, and upskilling our workforce."
He explained that the new living wage, apprenticeship levy, and insurance premium tax hikes will all affect businesses, and higher interest rates will affect consumer spending - all having an impact on the Treasury's tax receipts.
Mr Izza added: "Next year sees an increase in the living wage, which will especially hurt the retail, hospitality and care sectors. Furthermore, the removal of Dividend Tax Credit, the increase in insurance premium tax, and the apprenticeships levy will all hurt businesses, and I’m not convinced lowering Corporation Tax will compensate. A future interest rate rise will also damage both businesses and consumers, who we’ve been relying on for growth. These will all potentially lead to lower tax receipts, and if that happens, the Chancellor simply won’t meet his deficit reduction target. It will become a three-parliament problem.”
Despite the ICAEW's warning over the speed of deficit reduction, the organisation upgraded its growth forecast for the UK economy.
It said a post-election boost to business confidence would help the economy to grow by 2.6% this year, up from its earlier forecast of 2.3%. In addition, rising earnings growth and low inflation are continuing to boost household spending.
Its forecast of 2.6% growth in 2016 remains unchanged.
The ICAEW expects business investment to rise 7.4% this year, before slowing to 5.9% in 2016, compared with earlier forecasts of 4% in 2015. Unemployment, however, is likely to continue growing. The organisation believes businesses are starting to make better use of their existing workforce rather than adding to it, and part-time work is falling. That will lead to an unemployment rate of 5.4% by the end of the year, up from 5.1% earlier in the year. Making better use of the current workforce will have a better impact on productivity, the ICAEW believes. Productivity has been highlighted as a key problem for the UK's economic growth. But after rising just 0.7% in 2014, it is forecast to grow 1.2% this year and 1.3% in 2016.