The economy

We note that there is considerable uncertainty around the Government's GDP growth forecasts for 2009-2011, reflecting the fact that the UK economy is in uncharted territory. Whilst it is possible that the Government will meet its growth forecasts, on the available evidence this is an optimistic assumption. We question the decision to assume that the economy will begin registering positive growth as early as the fourth quarter of 2009, and that the economy will register such strong growth in 2011. We are concerned that the sharp recovery in consumption forecast for 2011 might be too optimistic given that the UK economy will only just have emerged from a sharp downturn. The strong rebound forecast in consumption growth from 2011 onwards has important implications for whether the rebalancing of the UK economy, with a shift away from consumption and a rise in the savings ratio, is merely a short-term phenomenon.

We note that it is too early to judge whether the November 2008 fiscal stimulus has been successful. There has been much discussion of whether an additional fiscal stimulus is appropriate, separate from the stimulus provided by the automatic stabilisers. Any discussion will need to take account of both the implications for the public finances and the credibility of the Government's plans to bring the budget back into balance.

With unemployment likely to rise above three million, and approximately 40% of the unemployed likely to be young people aged under 25, unemployment measures will need to focus on assisting young people. It is, however, too soon to judge whether the Government's proposed guarantee of a job, work placement or training scheme for all young people who have been on Jobseeker's Allowance for 12 months, together with the monetary and fiscal stimuli, will be a sufficiently timely and substantial response to the unemployment challenge.

The Asset Purchase Facility is a crucial tool of monetary policy. We note the concern of some that not enough is being done to provide adequate liquidity in the corporate debt market. We expect the Bank of England to take every opportunity to use the £50 billion allotted to the purchase of corporate debt under the Facility to ensure those markets operate effectively. We also recommend that the Debt Management Office and Bank of England develop strategies for the Bank to dispose of its holdings of gilts and corporate debt.

Public finances

We note that the Chancellor's forecasts for public borrowing and national debt represent the worst fiscal outlook since the Second World War. By any measure, those forecasts, along with those of many other OECD countries, are extremely high. It is now critically important that the public, and crucially, the markets believe that the Chancellor is working to an adequate plan to restore the public finances to good health. The credibility of any attempt to restore the public finances will depend on an acceptance that the structural deficit must be addressed as well as the consequences of the current extraordinary circumstances. We recommend that future Budgets and Pre-Budget Reports provide a sectoral analysis of tax revenues, so that, as the UK economy becomes less dependent on financial services and other sectors become more prominent, the basis of the Treasury's revenue forecasts can be scrutinised.

The Temporary Operating Rule appears to us to offer no constraint at all on the fiscal decisions of the Chancellor. It is clear to us the only real financial discipline on the Chancellor is the opinion of the gilt market on the sustainability of the public finances. We note the reaction of the gilt markets to the Treasury's borrowing plans but consider it would be prudent for the Treasury to work up contingency plans for a weakening of demand for Government debt.

We believe that a thorough analysis of all the options for a fiscal framework should now be considered.

Child poverty

We are concerned by the lack of any substantial measure to combat child poverty in both the Pre-Budget Report 2008 and Budget 2009. On current indicators the Government will fail to meet its 2010-11 target by a significant margin. We are dismayed that, despite our repeated warnings, the Treasury has failed to take sufficient positive action to ensure that the child poverty targets are met. We recommend that the Government use the Pre-Budget Report 2009 to indicate the numbers of children in both relative and absolute poverty and the measures it will take in order for its target to halve child poverty by 2010-11 to be met.

Housing market

We call for a more stable framework for the payment of Local Housing Allowance. We are not convinced that schemes to boost the market, such as the stamp duty holiday, will have any marked effect. We call on the Government to provide a cost-benefit analysis of the stamp duty holiday and to report in the 2009 PBR on the implementation of the asset-backed securities scheme.

We welcome the help announced in the Budget for homeowners, but we regret the delays in implementation and the lack of clarity in respect of some of the schemes, especially in entitlement to Support for Mortgage Interest. We recommend that the Government takes urgent steps to ensure that clear information is provided for homeowners on the support that is available to them if they get into financial difficulties as a result of the recession.

Vehicle scrappage

We recognize the importance of the car industry and note that the vehicle scrappage scheme has been welcomed in some quarters. Although it will support 300,000 new vehicle sales, it is likely that only one-third will be additional sales. Of the additional or accelerated new vehicle sales just 12,600 could be new UK-manufactured vehicles, although we acknowledge that most cars sold will contain a high proportion of UK-manufactured components and that car retailing will benefit. We await the 2009 Pre-Budget Report to assess how effective the scheme has been.

The 50p tax rise

We believe that there are considerable uncertainties over the yield to be raised by the 50% top rate of income tax. We recommend that the Treasury should report in the 2011 PBR on the revenue raised, both nominally and as a percentage of the theoretical maximum revenue, by the new top rate of income tax, and assess at that time the yield obtained from the higher rate against its disadvantages. If the higher rate were to continue it would be appropriate to consider what reforms are required to prevent further leakage. The Treasury should indicate if it would revise the rate in the event that the estimated revenue yield fell well below its forecasts. We are concerned that the Chancellor lacked a robust basis for the selection of the threshold from which the new rate would apply and for choosing what that rate should be.

Tax relief on pensions

We note that this Budget marks a departure from the long-standing principle that tax relief for pension contributions should be given at an individual's marginal rate tax. We urge the Treasury to monitor the effect of this change on pension savings and to keep under review the possibility that a cap on annual contributions might be a more equitable way of reducing the percentage of tax relief that benefits the highest earners.