Britain's public borrowing soars as recession bites hard

Britain will borrow more than any other nation in 2010
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The Government will borrow more than any other major economy next year, according to the latest predictions by the IMF and trends indicated in data released by the Office for National Statistics (ONS).

Economists say the UK seems set to borrow close to £300bn this year and next – £6,000 for every British citizen. That will propel the UK to the top of the international league table for budget deficits and help take the national debt beyond £1trillion (£1,000,000,000,000).

It places the Chancellor, Alistair Darling, in an exceptionally difficult position as he frames his next Budget, to be unveiled on 22 April.

The IMF forecast the UK's borrowing will reach about £165bn next year, or 11 per cent of gross domestic product (GDP), the highest seen since the Second World War. Many independent economists say it could go as high as £200bn as the recession bites.

In any case it will be by far the largest sum among the G20 group of advanced and fast-growing economies, whose leaders are set to meet at a summit hosted by Gordon Brown on 2 April.

Although the borrowing will undoubtedly help to boost the economy in the short run, critics say it will load huge debts on to future generations of taxpayers and will severely limit the scope for public spending and tax reductions in the run-up to the next election and for years ahead.

David Cameron said yesterday that plans to cut taxes would be put on the backburner by an incoming Conservative government because of Britain's debt crisis. The Tory leader signalled an onslaught on public spending in an effort to tackle "the most red-inked, ruined public accounts in modern British history". He said the moves would have to take priority over previous commitments to reduce taxes.

A Cameron administration would guarantee above-inflation increases for the NHS and foreign aid but budgets for other Whitehall departments would be scrutinised for savings.

Yvette Cooper, the Chief Secretary to the Treasury, claimed the Tories were proposing cuts to apprenticeships, housing and transport in the middle of a recession. She said the moves were "economic madness that would cost us all more in the long run".

City economists say that the widening budget deficit is already limiting the scope Mr Darling has.

Jonathan Loynes, from Capital Economics, said: "With public borrowing set to soar towards £200bn next year, there are growing signs too of a structural black hole in the public finances, perhaps reflecting permanently lower levels of profits and income in the financial and housing sectors. It would seem to place some limit on the size of any further stimulus Mr Darling might implement in next month's Budget and underlines the need for a major fiscal consolidation in the future."

The ONS reported that the Government had to borrow £9bn in February alone, bringing its total borrowing in the year to date to £75.2bn – more than £50bn higher than last year.

The Government is on course to borrow £100bn over 2008-09, say analysts, more than double what the Chancellor forecast in last year's Budget (£43bn).

Gemma Tetlow, a senior research economist at the Institute for Fiscal Studies, said: "The deterioration in the outlook for borrowing is mainly down to weaker-than-anticipated tax receipts, in particular VAT. Receipts of corporation tax have also been weaker."

Bad as this year's borrowing figures are, the intensity of the recession will push the public finances even further into the red.

The IMF said this week the UK economy would shrink by 3.8 per cent over 2009, compared to a Treasury prediction of a 1 per cent fall.

That would add tens of billions to borrowing which is already set to rise to £118bn, a post-Second World War record.

Adding in the liabilities of the Royal Bank of Scotland and other nationalised and semi-nationalised banks could see a surge in national debt from about 49 per cent of GDP today to 400 per cent or more, way ahead of the previous peak of 262 per cent of GDP it stood at in 1946. Then as now that could usher in decades of slower growth.

So where could the cuts fall?

Health

Spending is scheduled to rise by only 1.1 per cent from 2011, and the NHS may well be subject to a squeeze. The NHS has enjoyed a boom since 2001, and even now demand for medical staff is healthy. But the crisis in some trusts may mean painful decisions for managers. Could union resistance spell a new "winter of discontent"?

Support for business

A favourite target for tax cutters. Yet if Lord Mandelson's department has to reverse the state aid now destined for the car and other industries, who will explain to workers in marginal seats why this is being done?

Defence

The winding down of commitments in Iraq ought to mean lower bills. Big question marks may surround the new generation of aircraft carriers and even the nuclear deterrent.

Transport and housing

A major engine for boosting the economy; expect spending on roads, rail and public housing to be pulled back.

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