A six-year, £500bn bet on the future
THOSE whom the gods wish to destroy, they first load with debt. Yesterday, Alistair Darling, the Chancellor, loaded the British economy with the highest level of debt ever recorded – a £512 billion mountain, stretching out to 2015.
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That, and the total for public sector net debt smashing through 1 trillion in 2012-13, are history-making figures.
Amid the leaked cut in VAT to 15 per cent and the leaked rise in tax for the well-off, it was the numbers on debt that visibly shook MPs at Westminster yesterday.
The red-ink numbers dominated a defining Budget of this government that was designed to rally confidence and stimulate spending.
But will it? The 13-month VAT cut will put 12.5 billion into the economy. In "normal" times, a VAT reduction would be a big incentive for consumer spending.
But these are not normal times. Such are household worries about the plunge into recession and the rise in unemployment that it may well take more than a clip off prices to inspire households to spend at present.
Mr Darling's great gamble is that this Pre-Budget Report, boosting the economy by 20 billion over two years, will not only spare us the mother of all recessions but kickstart a recovery in 2010.
That is an astonishingly optimistic projection, with estimates of economic performance markedly more sanguine than those from independent forecasters. And on it is riding a rise in debt to the highest level ever proposed by a UK government in peacetime.
Over the five years from 2008-09 to 2012-13, government net borrowing will soar to 457.6 billion, against the 162.5 billion forecast in the Budget this spring – a near threefold increase.
Over the six years to 2013-14, the total climbs to 512 billion. We will not be back in balance (excluding investment) until 2015 – seven years from now. Meanwhile, public sector net debt sweeps up through the 1 trillion barrier.
If Mr Darling did not seem altogether confident in his delivery yesterday, it is because he had little reason to be.
Not only do these projections assume no more bad news for the next six years, but also that the Treasury's fateful track record in deficit forecasting undergoes a miraculous, 180- degree turn.
For the fact is that every deficit forecast in every single Budget for the past ten years has fallen well short of the actual deficit incurred.
There are many measures in this package designed to help business. In fact, the business lobby got almost everything it asked for, from a suspension of the rise in small firms' corporation tax to a 1 billion small firms' aid package.
But the half percentage point rise in National Insurance contributions will disappoint many.
For Labour back-benchers, there was a strong redistributive tone to the whole package, with help targeted at the less well-off and pensioners. That will help many householders as the recession deepens in the early months of next year.
But for middle-income families on whom the government is now relying to shake off the blues and kick-start a spending recovery, there is little comfort at all.
Indeed, they will feel like sacrificial lambs on the altar of the Chancellor's pledge to keep public spending rising at a rate of 1.2 per cent in real terms over and above inflation and to drive public spending to a new all-time record of 682 billion in 2010-11.
To maintain this public spending growth, Mr Darling is running up more new borrowing than the peak seen under the Conservatives after the 1990s recession and more than under Denis Healey, the Labour chancellor of the 1970s.
Mr Darling said total public sector debt would rise steadily from 41 per cent this year to a peak of 57 per cent of national income in 2013-14. These figures underline the damage that will be wrought on the public finances by the recession.
Tax revenues are slumping – the Chancellor pointed out that corporation tax payments from financial services were likely to be down 35 per cent this year, with stamp duty from house sales also down 40 per cent.
Supporting this debt edifice are some notably higher-than-average forecasts for economic performance in the two years ahead.
Mr Darling announced the largest ever downward revision of his forecasts for 2009 – from plus 2 per cent estimated eight months ago to between minus 0.75 per cent and minus 1.25 per cent. Independent forecasts range up to a contraction of 2 per cent next year.
Whether the package works or not will depend on whether the forecast return to economic growth takes place. Given the scale of fiscal retrenchment predicted for each year, especially in 2010 when VAT goes back up to 17.5 per cent, achieving the predicted growth of 1.5 to 2 per cent is likely to be tough.
The City has responded well so far to rather greater tax rises in future years than had been expected. But after examining the small print, and particularly when external forecasters cast doubt on the growth forecasts, both equity prices and the pound may fall back.
Mr Darling is relying on interest rates remaining very low for the next few years – probably with a base rate of about 1 per cent until at least 2011. He will need the banks to resume lending and also require the world economy to pick up.
Douglas McWilliams, of the Centre for Economics and Business Research, said: "Even when he was standing up, the explanations hardly sounded credible. After the small print was released, the Chancellor's position looked even more unbelievable.
"The headline new higher rate of tax at 45 per cent was presented as if the rich were to pay. Actually, this is expected to raise only 600 million – even on the Chancellor's over-optimistic arithmetic. Our numbers suggest it will be 400 million at best.
"But the big tax hike is for those earning more than 20,000 a year who will pay an extra 0.5 per cent National Insurance contributions and whose employers will pay another 0.5 per cent.
"Despite all this, it is to take five years before the public finances approach balance, and then only on current account. And all this depends on everything going right in the real economy.
"He will have to keep his fingers crossed – and also his toes."
Attention will swing in coming weeks to the government gilt-edged market and to sterling.
For this package is critically dependent on both UK institutional funds and overseas investors buying the truckloads of government debt that are coming on offer.
Mark Oswald, of Monument Securities, commented: "It is very bad that the public finances are expected to return to the current (very poor) levels only by 2015-16.
"Trying to offset some of the VAT cut with a rise in environment (petrol) and sin taxes (alcohol/tobacco) borders on the farcical."
The new measures at a glance
• New tax rate of 45 per cent from April 2011 for people earning more than 150,000.
• Freeze in personal tax incomes from April 2010 for people earning between 100,000 and 139,999.
• Scrapping of personal tax allowances from April 2010 for people earning 140,000 or more.
• National Insurance to increase by 0.5 per cent from April 2011 for employees and employers.
• VAT cut from 17.5 per cent to 15 per cent for 13 months, starting on 1 December.
• Public spending of 3bn on roads, schools and hospitals will be brought forward from 2010-11.
• Tax levy increased on alcohol, tobacco and fuel to counter-balance the VAT cut and hold prices at same level.
• Fuel duty to increase by 2p a litre from 1 December.
• 120 tax handed to 10p tax losers to be made permanent – with further 130 forthcoming.
• 1.20 increase in child benefit to be brought forward from April to January, taking it to 20 for first child and 13.20 for other children (up 65p).
• 60 bonus payment to all pensioners in January.
• Government net debt to increase to 57.4 per cent of the value of the UK economy by 2013-14.
• Economy predicted to fall into recession next year, with growth of -1.25 to -0.75 per cent. But due to bounce back in 2010 with growth of 1.5-2 per cent.
• Inflation forecast to fall from 4.5 per cent now to 0.5 per cent next year.
• Borrowing to exceed 511bn by April 2013.
• Personal tax allowance increased by 440 to 6,745 from next April.
• Working tax credits increased by 90.
• Air passenger duty increased from November 2009, and four bands introduced. Will cost between 12 and 85 per passenger depending on length of flight.
• Car tax to increase by 5 for each band – but penalty of up to 90 for most polluting cars limited to 30, as is bonus for "green cars".
THE PRE-BUDGET REPORT: FULL COVERAGE
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Sunday 19 May 2013
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