Britain's bill has risen to £3bn - but it could end up at more than £10bn

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The Independent Online

The additional costs of a long war would be considerable but they can at least be quantified. Much harder to assess is the impact on economic growth and hence on the British Government's revenues.

The additional costs of a long war would be considerable but they can at least be quantified. Much harder to assess is the impact on economic growth and hence on the British Government's revenues.

Yesterday the Chancellor acknowledged that the bill for the war had risen from £1.75bn to £3bn, plus £125m for reconstruction – or rather that is the amount being set aside. It looks far too low. The American President has sought an additional $75bn, a figure that includes some reconstruction but which was predicated on a 30-day war. That would be a little less than £50bn at present exchange rates. If you take as a rule of thumb that we are supplying one-fifth of the troops and therefore will be paying one-fifth of the bill, the figure looks close to £10bn. Assume a longer war and the costs rise further.

They do not rise in a straight line, however. Military policing, as is taking place in the Balkans, is cheaper than a shooting war. So a back-of-an-envelope totting up of a six-month exercise would suggest a figure somewhere above £10bn but below £15bn. To put that into context, total public spending in this financial year will be about £420bn, and in the year that starts next month, £450bn. You could say it was big enough to matter but not so huge as to upset all the Budget arithmetic.

The greater problem of a longer war – in economic if not in human terms – would be what it might do to economic growth and to tax revenues. The longer the conflict the more likely people are to put off major purchases, to move house or to spend money on travel and entertainment. Such a slowdown would not, of course, be confined to Britain. A drawn-out conflict would damage economic confidence throughout the world. So exports would slow, as well as home demand and it would be surprising if this were not reflected in some rise in unemployment, further depressing demand.

One immediate effect here would be on the revenue side of the Treasury accounts. A fall in tax receipts is already causing concern. Last week the Treasury revealed that tax receipts for the first 11 months of the financial year were up only 0.7 per cent, against a projected rise of 2.6 per cent. Income and corporation tax receipts actually fell and the total was only up because of strong returns for VAT and stamp duty – a function of the consumer boom and strong house prices.

Tax receipts in the coming year were forecast to rise from £400bn to £430bn. It would be astounding if that were to happen. If there were a long war and correspondingly slow growth, it is conceivable that despite the national insurance and council tax rises, total tax receipts might actually fall. The potential swing in revenue is much larger than the potential swing in spending. So much depends on confidence. If confidence were to return consumption would stay reasonably strong, investment would recover and the economy would continue to grow. If not, the current downturn will look much more like those of the early 1980s and 1990s than the extremely mild slowdown we have experienced so far. But confidence can hardly return while war rages in the Middle East.

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