Pre-Budget report: Borrowing hits post-war record
Alistair Darling yesterday became the Chancellor with the worst economic
forecasting record and the worst borrowing record in modern history.
The Government used its pre-Budget report to slash its UK growth forecasts by
the biggest amount since it started projecting annual output in the 1970s and
acknowledged for the first time that Britain is facing a recession. The economy
will shrink by 1pc next year, it said, rather than the 2.5pc growth projected in
the Budget earlier this year.
In what was billed as the most important Treasury statements in decades, Mr
Darling ordered a slew of tax cuts and spending increases worth some £25.6bn
over the next year and a half in an effort to prevent the slowdown deepening.
Millions of shoppers will benefit as value-added tax is reduced from 17.5pc to
15pc from next week.
The Chancellor initiated a bonfire of previous policies, effectively permanently
reversing the abolition of the 10p tax rate, while postponing planned increases
on vehicle excise duty and the rate of corporation tax paid by small companies.
Michael Saunders, UK economist at Citigroup, said: "This massive stimulus should
prevent a complete meltdown of the UK economy, but probably will not prevent a
The measures, designed to focus specifically on next year, will be paid for with
a £12.3bn series of tax increases and spending cuts from 2010 onwards. Most
significant of all is a half percentage point increase in National Insurance
rates for both employees and employers, a measure which equates in short to an
extra penny on the basic rate of income tax. Those earning over £100,000 will
also see their tax bill increase as their personal allowances are cut, and those
earning more than £150,000 will have to pay a new 45pc rate of income tax.
Nevertheless, even these increases will be insufficient to fund the drastic
series of tax cuts, and as a result the Government is borrowing record sums.
After more than doubling to £78bn this year, the fiscal deficit will balloon to
£118bn, or 8pc of gross domestic product, next year - the highest level in
post-war history. As had been widely expected, the Chancellor abandoned the
borrowing rules laid down by Gordon Brown in 1998. The UK's national debt,
currently at just below the 40pc of GDP level laid down by the sustainable
investment rule, will balloon to 57.1pc - the highest level since the 1970s.
Almost as striking as the scale of the deficits is the amount of time they will
persist on the Government's balance sheet, economists said. The Treasury will
generate deficits in excess of 3pc of national income - the generally-accepted
"reasonable" level - until 2013. The deficits are caused by a massive drop in
tax revenues as well as the extra tax cuts announced by the Chancellor.
Neither did the Chancellor make explicit commitments to re-embrace the fiscal
rules, save for pledging to return to a balanced budget by 2015-16. Although the
pound rose higher against the dollar in the wake of the statement, the cost of
insuring against the UK defaulting on its sovereign debt increased sharply, with
credit default swap spreads up from around 70 basis points to 86 by last night -
double the size of America and Germany's.
Economists questioned why the Chancellor had not been clearer about how he would
achieve the return to balanced books.
"The increase in National Insurance contributions and the higher rate of income
tax don't seem to be enough" said Andrew Goodwin, an economic adviser to the
Ernst & Young ITEM Club.
Marc Ostwald, strategist at Monument Securities, highlighted that even in 2015
it looked likely that the public finances would be in no better shape than they
were last year.
"The end effect is little obvious benefit to the economy, a borrowing binge, and
the gilt market has a lot more bad news to price in," he said.
Shadow chancellor George Osborne warned that the Chancellor was "bringing this
country to the verge of bankruptcy".
Simon Ward, economist at New Star, added that the Treasury's economic forecasts,
which project a sudden improvement in UK economic growth in 2010 and 2011, could
be overly optimistic, with major implications for the rest of the PBR calculations.
He said: "A key risk is that the economy has not regained sufficient momentum by
2010 to withstand programmed large tax rises. Government debt will embark on an
explosive path if these increases are postponed."
The portrait of the UK economy painted by the PBR document is of an economy
facing a mild recession, as opposed to the deep and lasting one projected by a
growing number of City economists. The cut in VAT rates will also contribute to
lower shop prices, with the retail price index set to drop into negative
territory next year, causing deflation of 2.25pc.
Martin Weale at the National Institute of Economic and Social Research, said
that the Chancellor's outlook for the economy still looked unrealistic.
"The PBR estimate of trend growth looks very optimistic, and the recovery into
2010 they forecast is hopeful. In the medium term, too the borrowing forecasts
still look optimistic," he said.
Howard Archer, chief economist at Global Insight, said: "Seeing a projected
Public Sector Borrowing Requirement of £118bn (8pc of GDP) in 2009-10 is
somewhat alarming, particularly when there are suspicions that this is based on
too optimistic a recovery profile."