Osborne Should Consider Stimulus as Euro Crisis Weighs, PwC Says

PricewaterhouseCoopers LLP said the U.K. economy faces “significant” growth risks and that Chancellor of the Exchequer George Osborne has room to provide a boost to the economy in his budget this month.

Gross domestic product will expand 0.6 percent this year, the London-based consultant company said in an e-mailed statement today. Exports, the Olympics and slowing inflation will support the recovery in the second half and growth will accelerate to 1.8 percent next year.

The government will probably undershoot its borrowing projections by 7 billion pounds ($11 billion) in the current fiscal year, putting it on track to eliminate the deficit by 2017, PwC said. Osborne, who will present his budget on March 21, should consider “carefully targeted fiscal stimulus” with measures such as capital spending. The economy contracted 0.3 percent in the fourth quarter.

“Risks around growth in our projections are significant at present given ongoing challenges in the euro zone,” John Hawksworth, chief economist at PwC, said in the statement. “We recommend that businesses stress test their plans and valuations against an alternative ‘double-dip recession’ scenario.”

Any new spending to support the economy should be “offset by more tightening later as and when the recovery is stronger,” PwC said. The government should also consider “supply-side” measures such as reforming tax and easing regulation, while focusing government spending on areas that provide “long-term” benefit such as infrastructure and education.

‘Limited Room’

Andrew Sentance, senior economic adviser to PwC and a former Bank of England policy maker, said that while Osborne has “limited room for maneuver,” he should present medium-term measures to lower personal and other tax rates. Reforms should “take over from the emphasis on demand stimulus we have seen since the financial crisis,” he said in the statement.

Government figures last month showed that the deficit in the first 10 months of the fiscal year was 93.5 billion pounds, compared with 109.1 billion pounds a year earlier. Osborne said this week he won’t allow “unfunded giveaways” in his budget.

In a separate report today, VocaLink Ltd. said annual U.K. wage growth slowed to 1.8 percent in the three months through February from 2 percent in the period through January, reflecting “ongoing weak economic conditions.” The company processes 90 percent of British salaries paid directly to bank accounts, and uses salary-payment data from more than 200 members of the FTSE 350 Index and more than 600 government-related organizations for its report.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE