"Shock" is the word that probably best sums up the reaction in the City to yesterday's Budget. Shock and disbelief. Shock that the Chancellor could have got his sums so spectacularly wrong. Shock that the borrowing figures are so high, historically so, pushing the national debt well beyond £1 trillion. Shock at the thought of investors attempting to mop up the planned £240bn of government securities, gilts, or national IOUs, even with the Bank of England buying some of them up to pump cash into the economy. Disbelief, too, about the Government's growth figures – too optimistic the economists said.
Mr Darling says the economy will grow again by the end of this year; the IMF, and almost everyone else, begs to differ.
Only last November Mr Darling said that the Government would need to borrow £118bn next year. Yesterday he upped the ante to £175bn instead. The increase alone – £57bn – is bigger than any of Labour's previous budget deficits that is apart from the £90bn just recorded for 2008-09. Over half a trillion pounds of borrowing is scheduled over the next few years. It could easily be more. The cost of servicing it could be more than the NHS budget. The public finances will come nowhere near balance until 2018 on the Government's own forecasts, with some experts predicting that the national debt will rise inexorably into the 2030s or the 2050s, by which time, even their most ardent fans might agree, Mr Darling, Mr Brown and perhaps Mr Cameron too will have long since departed Downing Street. "In the long run", Keynes famously said, "we are all dead", but this is getting ridiculous.
For a Government that may not have very long to go, and a Chancellor who might otherwise find himself confined to the footnotes, some history was written yesterday. The national debt will climb to about 80 per cent of national income, the highest in at least half a century, taking us back to the days when the nation was still paying for two world wars and the founding of the welfare state, rather than a tragi-comic banking debacle. Alistair Darling's borrowings in 2009-10 will represent 12 per cent of GDP – the highest in peace time, easily thrashing the records set by those other recessionary chancellors, Denis Healey in 1975-76 (7 per cent of GDP) and Norman Lamont (8 per cent) in 1993-94. On Mr Darling's estimates the era will see the economy decline by 3.5 per cent, which would make 2009 the worst year for economic growth since the Second World War. Public spending is set to grow by a minuscule 0.7 per cent a year – expect strikes over pay in a world where public expenditure grows more slowly than it did under the Tories. Defence and the universities look set to be hardest hit.
Perhaps most shocking of all was the fact that these borrowings are not solely caused by the recession; they are structural as well – more to do with political choices in the past as the natural play of the economic cycle, which depresses tax revenues and pushes the cost of social security benefits up. The Government entered the recession, as the governor of the Bank of England, Mervyn King, has said, borrowing too much, and has little room for manoeuvre now. The latest OECD numbers show the way in which the UK's borrowings are a legacy of recent incontinence rather than international forces.
Here again, records were set, shocking some. With the new 50p rate of taxation, the UK goes back to marginal levels of taxation not seen since Nigel Lawson brought the top rate of tax down to 40p in 1988. With national insurance thrown in, the rich will soon pay about 64p in the £ of any extra income they earn in tax.
That would not be such a shock were it not for the fact, highlighted by the Institute for Fiscal Studies this week, that raising the higher rate of tax even to the 45p first thought of, might even lose the Treasury money as it moves to the wrong side of the "Laffer curve", named after the economist who pointed out the tendency of punitive taxation to yield diminishing returns.
The UK seems set for decades of sluggish growth, a return to the 1960s and 1970s when the burden of high national debts kept improvements in living standards and in public services alike frustratingly meagre. Shocking.