Roger Bootle, economic adviser to Deloitte, gives his emergency Budget predictions

• The new Government's emergency Budget on June 22nd will mark the beginning of the biggest fiscal squeeze seen since the end of the Second World War. This will act as a significant drag on the economy over the next few years and necessitate the need for extremely loose monetary policy.
  
  
• On the face of it, this week's interim forecasts for the public finances published by the Office for Budget Responsibility (OBR) seemed to relieve the pressure for a major fiscal tightening in the Budget. The forecasts for public borrowing were revised down from those in the March Budget.
  
  
• But there are good reasons for thinking that the Budget will still be a very tough one. For a start, the Government has already suggested that the OBR's forecasts "flatter" the fiscal outlook. What's more, its new fiscal mandate is likely to centre on the structural budget deficit, the forecasts for which were actually revised higher by the OBR. Eliminating the deficit altogether by the end of the parliament could take further tax hikes and/or spending cuts of up to £50bn.
  
  
• Perhaps most importantly, there is a very strong political motivation for the Government to implement painful measures when they can most readily be blamed on the previous administration.
  
  
• Taking these factors together, I expect the Budget to unveil a fiscal tightening building up to around £20bn p.a. by 2014-15. Some of this will consist of an even tighter squeeze on public spending, the details of which will be filled out in the autumn Spending Review. But tax hikes are also likely. Alongside the already planned rises in capital gains tax and employers' national insurance, a rise in VAT still looks like a prime candidate.
  
  
• The Government will no doubt hope that the OBR will endorse its measures by revising its medium-term forecasts for the economy higher in the Budget. But with little scope for monetary policy to offset the squeeze, I expect the fiscal squeeze to be a significant drag on growth.
  
  
• In the markets, gilts will respond favourably to decisive action to tackle the fiscal mess, but equities will worry about the impact on economic growth and profits. The impact on sterling is less clear, but I suspect that an improved fiscal outlook will be supportive for the pound.