The public finances are a car crash. That much we knew. What we did not realise until yesterday was just how mangled they are.
First, let's do some rubber-necking as we drive past the gore. Approaching the scene of the accident, the damage doesn't look too bad. Even when a government is way in the red, as now, there will still be some months when the taxes roll in. The important thing is to compare "like with like", and examine this month's showing, and the year to date, against last year, say.
So what do we observe? Well, the public finances posted a bigger than expected surplus for July: £4.8bn against a consensus view among City economists of £4.3bn. But despite that healthy-sounding headline figure, the surplus in July is still £1.6bn lower than that recorded in the same month last year – £6.4bn. So July was actually £1.6bn "short".
Even that looks better than it is: July is usually one of the positive months for the public finances, boosted by corporation tax receipts, and so far this year these have been much flattered by the addition of £2bn in extra corporation tax receipts from companies involved in North Sea oil activities.
So while corporation tax receipts from April to July are up on the same three months of last year, by 3.2 per cent, they actually needed to be more than 10 per cent higher to meet the Government's hopes of keeping borrowing under control.
Receipts from taxes other than corporation tax have been falling, while Government spending has been running rather ahead of where ministers thought it would be. Central government spending is up 6.9 per cent on where it was last July. It is supposed to be up around 5 per cent. Hence the mess.
So how big is the deficit? So far this year, HM Treasury has borrowed £19.1bn on our behalf, against just £8.4bn at the same point in 2007. These numbers do tend to bounce around a bit, but they represent a whole third of the fiscal year, so they're a fairly hefty piece of evidence.
At this rate, the Government will end up borrowing more than £80bn during 2008-09, around double their stated figure in the Budget of £43bn, itself revised upwards from £36bn in the pre-Budget report last October, which was itself an upward revision of the £30bn guessed at in the 2007 Budget, Gordon Brown's last.
Most economists don't think it'll actually get as bad as that, but a reasonable guess for the next pre-Budget report would be an upward revision of £10bn to £12bn, taking the figure well above £50bn, levels last seen in the previous recession 15 years ago, around 4 per cent of GDP. In other words, the Government has indeed warned us that it was about to collide with reality, as a result of an attempt to swerve around the credit crunch, but it may have been a little optimistic about the speed of the impact.
Now it is only fair to point out that, adjusted for inflation, Mr Darling's deficit will still be better than that seen under his predecessor but two as Chancellor, Norman Lamont. Mr Lamont's peak borrowings in 1993 amounted to about £110bn at today's prices, and represented almost 8 per cent of GDP. That really was a smash.
Only the most wildly pessimistic could see the present incumbent of No 11 breaking those records. Nonetheless, it is worth wondering how it is that the ultra-posh Loretto School, an extremely well appointed public school just outside Edinburgh, for those not familiar with the Scottish independent education scene, came to produce two of the last four chancellors, and, it so happens, the pair who both drove their nation's economy into recession.
I have no idea whether Mr Darling and Lord Lamont, as he now is, ever bump into each other at reunions of Old Lorettonians or at other functions, but they have much in common and would have much to chat about. They might even take to comparing notes about the wretched task of loyally carrying out an economic policy dictated by an ungrateful, beleaguered, boss, and how sweet revenge can be. But I digress.
As we peer closer at the public finances, we notice more grief. Stamp Duty, for example. Slower activity in the housing market and the stock exchanges has pushed receipts much lower. Yesterday, the Office for National Statistics stated that in July they were down by 37 per cent on the same month last year, and are running 33 per cent off where they were this time last year. The cumulative loss is £2.2bn this financial year, with the normal uptick in receipts associated with the summer home-buying season much muted.
The problem, though, isn't so much this year as next. In the Budget, the Chancellor predicted a deficit of a mere £38bn in 2009-10. Three things will go wrong with that. It was predicated on growth of 2.5 per cent. If, as the Bank of England say, the economy stagnates instead, that will, on a conventional ready reckoner, add £12.5bn to the deficit. At least.
What growth there will be next year will be concentrated on the export side of things, a welcome readjustment but less fruitful in tax terms.
We also have the small matter of inflation, predicted by the Chancellor to fall back to the target of 2 per cent in 2009. No one, including the bank of England which is in charge of the anti-inflation strategy, believes that will happen. Something nearer 5 per cent will be seen this autumn, and that will be the basis for uprating may social security benefits, adding another few unexpected billions on to public spending.
With the cumulative total of borrowing growing so fast, there seems little chance that public sector net debt can be kept within the "sustainable investment rule" limit of 40 per cent, and this rule will almost certainly be broken in the next year, joining the inflation target, the Maastricht Treaty obligations and various other bits of the "end-to-boom-and-bust" framework lying wrecked in the gutter.
However, one substantial and rather dry-sounding windfall will help ministers. A technical redefinition of bank interest payments in the national accounts will boost national income by about 2 percentage points, adding, say, £12bn in borrowing "headroom" – enough to leave the £2.7bn U-turn on the 10p tax rate a permanent feature of the tax code.
Things will still be tight, though, and the chances are high that the rules will still be broken. In any case, we're going from a debt-fuelled growth rate of 3 per cent-plus to stagnation and even recession in a couple of short years. Like the rest of us, the public sector is dealing with overspending accumulated over several years. It will be like running into a motorway bridge. Soon we'll all know what whiplash feels like.Reuse content