The £39bn black hole in the Chancellor's Budget
Institute for Fiscal Studies report reveals scale of the crisis in the public finances, concluding that their is little room to provide much-needed boost to economy
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The Chancellor, Alistair Darling, will be unable to deliver any meaningful boost to the economy in his Budget in a fortnight's time, and an almost unprecedented squeeze on public spending will be required over the next few years – whichever party wins the next general election – according to a pre-Budget analysis by the respected Institute for Fiscal Studies (IFS).
An annual "black hole" approaching £39bn will need to be plugged if the nation's finances are to be brought back into balance as the Government plans, warns the IFS, a looming problem that leaves the Chancellor with even less room for manoeuvre in his Budget, due on 22 April. The IFS said: "Because debt is going to be so much higher than had been previously expected, it has become more dangerous to add to it – even relatively modestly."
As public borrowing for this tax year, 2008-09, climbs to £95bn – some £17bn more than anticipated in the pre-Budget report last November – the IFS forecasts that it will hit around £150bn in each of the succeeding three years, again way beyond government estimates. Even without the additional cost of the various bank bailouts, that will take the national debt to more than £1 trillion (£1,000,000,000,000), or 73.5 per cent of GDP by 2015.
As a proportion of the size of the economy it has not been at those sorts of levels since the 1960s. Even so, in aggregate terms it is still likely to be lower than that of Germany and Japan, and about the same as the US.
Such sums, however alarming, exclude an additional £130bn, or almost 10 per cent of UK national income, that will eventually be required to pay for the banking bailout – the IMF's latest estimate. In other words, the credit boom and consequent banking crisis will cost each UK taxpayer approximately £4,000 – even before they address the current increase in levels of debt.
The IFS says that, having climbed to 82.4 per cent of GDP including the cost of bank bailouts, public debt is unlikely to return to pre-crisis levels until the 2030s. Without corrective action national debt will go on to reach more than 90 per cent of GDP by the 2050s – by that point a century-long high.
Only by radical cuts to public spending, tax rises or some combination of the two can the "structural" deficit be resolved, says the IFS. Public spending will already be severely curtailed through existing government spending plans, with growth down to a meagre 1.1 per cent per year after inflation. But the IFS cautions that deeper, real terms cuts may be needed in the NHS, schools and other "front line" services.
Indeed the rising burden of servicing the national debt, as interest rates return to more normal levels, will result in the sort of spending cuts not seen since the early 1980s: "Because of rising real spending on debt interest payments, tax credits and social security benefits, this would require real cuts in most areas of government spending, and even favoured areas such as health and education would undoubtedly see much lower spending growth than they have received in recent years."
High profile expenditure items such as public sector pensions also seem set to move closer to the centre of the political stage, as all the major parties review their fiscal programmes.
A good deal of the deterioration in the UK's once healthy public finances is a natural result of the economy going into recession, as tax revenues traditionally fall and unemployment and other social benefits rise at this point in the economic cycle. Allowing this to take its course is now economic orthodoxy, these "automatic stabilisers" helping to keep the economy on relatively even keel.
In the 1930s politicians made the error of trying to balance the Budget during the slump by raising taxes and cutting spending – with disastrous consequences.
Even so, much of the current additional public sector deficit – rising to £39bn a year by 2015 – is also due to the British economy entering this recession with relatively high levels of public spending and borrowing, as well as the £20bn of additional or "discretionary" spending announced in last November's pre-Budget report, designed to prevent the economy slipping from recession to deflation and slump.
On Sunday the Chancellor, who has called for more "humility" from the Government, admitted he had badly misread the prospects for the economy and, by implication, public borrowing. At the time of the pre-Budget report, Mr Darling predicted the UK economy would shrink some 1 per cent this year, returning to growth of 1.75 per cent in 2010. The IMF's latest prediction is for a 3.8 per cent drop, with a further contraction of 0.2 per cent the following year.
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Comments
Now consider that what we have here is a two way process, in times of economical collapse, the private companies demand money from the taxpayer to survive yet in times of boom, the money is withheld from the taxpayer and moved into the hands of the few.
An Argentinian analyst simplified it as that in good times, finance and money is privatised and in desperate collapsing times, the debt is socialised onto you and me.
nuLabour show no sign of abatement of their horrendous spending and ludicrous projects and policies, the figures above will grow and grow until we are completely bankrupted out, we need to get rid of Labour NOW before it is too late and bring in a period of balanced and worthwhile investment and spending coupled with a period of austerity to allow our economy to heal.
I'd suggest the Liberal Democrats as they seem like a sensible compared to the continued switching between our main two parties who continue to make the same mistakes, but according to many, this choice is just an affliction of my youth.
It seems most of the older/majority voters are getting set to bring the Conservatives back into power, but speaking as a young son of a ex-mineworker in the North of England, I hardly think they have what it takes either.
Many people my age (I make no presumptions over yours) have either given in on trying to influence the system, are turning to Socialism for answers, or like me, supporting the Liberal Democrats with little hope of making any difference.
What are young voters to do, I wonder.
The BNP would also open up the coal mines, to help reverse what happened in the coal mine areas and also have a secure energy supply.
Also, I should add that the BNP is arguably a nationalist *socialist* party (centralised command control, trade tariffs, state owned businesses, etc.) - I wan't to make it very clear though, that I am not saying that as an excuse to call them 'Nazis' as many do; I'm simply stating their socialst ideals and nothing more.
For this reason, I'd count you as another young man who has turned to socialism. At very least, you have adapted an alternative form of politics amidst the struggle to find a solution to the mess we're all in. However, you may add nationalism to the list if you prefer. It may be better to treat them separately anyway, since they are pursued by such different people.
I'm not saying it's right or wrong. I'm simply assuring that you know your true position in my last comment.
Then you mention about your sons and friends being on dope and the BNP will as you know will take the hardest line. They would help sort out your son and friends and reduce this drug problem in this country, not the three main parties weak stance on everything. The BNP and as I do see Britian as a big famliy and we want to back you up to stop the madness of it all. I think of it as tough love.
Your judgement of our generation seems somewhat flawed - particularly in light of your less than marvelous level of input.
The other alternative to this would be to replace the current "reprehensible" democracy with a system like jury service where people are randomly selected and stand for a set time...
Also just look at Mr Darling career track record, is there any hope for the public?
The deficit is a lot, lot higher. How much higher would cause panic so it is not in our interest to know.
they will have to cut really hard now; I think all benefits(including mine) will need to be cut and that means the dole and housing benefit
can't really afford wars either to protect us from the mythical bin laden
Decades of neglect of the real issues have gravely harmed the UK, especially how to generate wealth in an increasingly competitive world with an ageing populataion and an education system that is now one of the least effective in the western world, let alone the East.
Answers to these sorts of questions elude our current political system. They are essentially social in nature. We may not be able to avoid them for much longer. What a pity that we have just wasted an enormous sum on our corrupt and ineffective financial system.
Brown's budget of 1997 was all about driving money away from private enterprise into Government coffers. It was all about lowering the cost of debt to facilitate an enourmous and protracted spending boom. His previous budgets built on the success of 97 letting him annouce that the virtuious circle of low interest rates, low inflation and endless debt spelling the end of "boom and bust".
We have been pump priming this economy for the last 30 years with cheap and accessible debt, we clearly have had no concept (me included) of what the implications of doing this would be. I believe we are now seeing the failure of excess and greed that so suited the political hirearcy of this nation for so many years.
We have simply assumed that debt is the equivalent of wealth and yet neither can deliver happiness and well being.
These numbers are meaningless to the majority,they are too big and vague to make any sense out of them. This is State run capitalism or communism by the back door.
Public sector employees multiply like rats, creating additional "work" to keep themsleves employed and to justify the enormous financial burden which they place on the rest of us. New labour is representational of this ethos, - consider how they have expanded redundant employment by the introduction of hundreds of new laws, all of which need hundreds of people to process their results. The employees themselves will do their best to ensure that the workload appears to be too great for them, so that still more clerks will join them, thus building their own empires.
A local council's housing department I know of, has the policy of not even opening new correspondence until it is five weeks old - because they have so much 'work' to do. This 'work' consists of frittering time away without achieving very much, in order that the files will still need working on tomorrow.
These idle drones, these parasites, will demand salary increases way above inflation again this year, and because they hold the reins of municipal services, they will try to paralyse the nation to get their own way.
If these swine can be curtailed, then Darling will not have a problem with his fiscal deficit.
to-day's fiasco is divided into two parts, 1. Banking crisis - we failed to regulate banks, 2. Government and personal debt -we were spending beyond our incomes and neither party was providing for the future. Brown had convinced everyone that there would never be another bust, alas now you know different and until Brown and his Government face up to reality, we in the UK will go further down inthe mire. A lot of people are being(and going to be) hurt in this present situation and the actions taken by the Government are making little change to improve the lifves of the people. Brown criticises the opposition as a "do nothing party" perhaps it would be better if he stopped doing some of the things he's doing and then we might see a light at the end of the tunnel. At present that light is an express train heading towards us.
I think history will conclude that Brown has been a total disaster for this country. The only thing he stated correctly was the end to boom and bust. He clearly knew we would never see another boom in most of our lifetimes.
That must be one of the most absurd statements I have read in a long time.
The average economist cannot even get it right just one year into the future.
Anyway, with the oil supply having peaked, with the Ponzi schemes that constitute the world economy unravelling and with environmental collapse accelerating, it's likely to be 'all over' by 2015, perhaps as early as 2011.