Bill Jamieson: Budget from Hell that would tax any chancellor

Published on Thursday 16 April 2009 22:02

BRACE yourself next week for the Budget from Hell. Don't be fooled by any temporary relief at having escaped lightly. For the debt and borrowing numbers that Alistair Darling now has the misfortune to unveil will be the worst that a post-war British chancellor has ever had to announce.

Short though his statement may be in big measures to beat a big recession, be in no doubt that the Budget next Wednesday will be the most momentous in decades.

It unfolds against the worst contraction in the British economy in 50 years and a collapse in the country's fiscal position that is nothing other than shocking. The Chancellor will announce the highest levels of debt as a percentage of GDP since the shattered aftermath of the Second World War.

The speed of this deterioration has been as alarming as its scale. In the Budget this time last year (entitled, ironically, Stability and Opportunity for a Sustainable Future) public sector net borrowing for 2008-9 was forecast at 43 billion.

This was then revised in the Pre-Budget Report last November to 77.6 billion. The out-turn is now likely to be in excess of 95 billion.

However, such escalation pales before the borrowing explosion in store for 2009-10. A year ago the Treasury forecast was for a deficit of 38 billion. Consensus estimates now place the figure at 150 billion. Some forecasts range even higher, to 175 billion, equivalent to 12 per cent of GDP, the largest in the UK's post-war history.

Moreover, these estimates are before any allowance for fiscal stimulus measures the Chancellor may announce next Wednesday. This could push the final figure towards 200 billion. The new budget deficit projections that Darling will announce next week as a percentage of GDP are utterly unsustainable and will be by far the biggest among the G20 countries.

The price of this deficit is that the UK is one of only two G20 countries that have had to announce fiscal tightening for 2010. It also explains why advance warnings of further tax increases are likely to feature next Wednesday among the hyped-up bric-a-brac of micro-stimulus so beloved of his predecessor.

The backcloth to this stunning collapse in the public finances is a spending binge coincident with the onset of a recession whose depth and severity has yet to impact on the sheltered Arcadia of the public sector, the six-figure salaryland of town hall chiefs and the crazy quangocracy of spend-to-bust Britain.

Mercifully, there are scattered signs that the ferocity of the downturn may now be starting to ease. But the economy has experienced a dramatic collapse in activity. Bank rescues have been required on a colossal and unprecedented scale. Business confidence has slumped and unemployment is climbing to three million, or 10 per cent of the workforce. House prices have fallen 20 per cent on average, while the stock market has slumped more than 40 per cent from its 2007 peak, this figure masking the rout in sectors such as financials, construction, media, retail, property and house-building, where collapses of 90 per cent are common.

As a result, the Chancellor will be forced to abandon as hopelessly over-optimistic official forecasts made only five months ago. Instead of a mild fall in GDP of 0.75-1.25 per cent envisaged in November, the OECD now forecasts the economy will contract by 3.7 per cent this year and by a further 0.2 per cent in 2010. The rapidity of the rise in unemployment over the past three months is the sharpest since monthly data began in 1971, outpacing even the worst days of the UK's three big post-war recessions.

Because of Britain's ballooning debt, there is little the Chancellor can do to alleviate the pain without risking a collapse in financial confidence. Indeed, the government is still "flying blind" and has yet to find a credible way out of all this. Soaring business failures, "zombie banks", cancelled business investment, frozen or abandoned commercial and office development, a plunge in house-building, ever more dilapidated town centres, real-terms cuts in public spending, three million on the dole and taxes heading skyward: seldom has the government's forecasting judgment been found more wanting.

There is just no way that it can maintain the line, repeated throughout last year, that the UK "has weathered the global storm better than most", or indeed that action previously undertaken has helped us to avoid the worst.

Darling has already announced a tax-allowance "clawback", due to be implemented next year for those with incomes over 100,000. There will also be a new higher rate of income tax of 45 per cent to apply to taxable income over 150,000 from 6 April, 2011. Other tax-raising options being considered are a rise in VAT to 20 per cent to bring it into line with rates in most of the rest of Europe.

But sooner or later the knife must be taken to ever-rising public spending and the "non-job" culture of the public sector.

But the Chancellor is boxed in politically, with an election looming next year. It will be tempting to push the day of tax reckoning as far forward as possible. But the longer the delay, the greater and louder the questions in markets about the sustainability of the government's finances and whether it has a credible programme back to stability.

So the trap is set: either the Chancellor sets out higher tax and spending cut measures to rein in the spending and borrowing binge (costly in votes), or he risks a massive gilt market and sterling slump. That would be the final coup de grce for an economy with no confidence to invest, banks too scared to lend, high streets with more shops boarded up, a Treasury that's bust and a population bent under the weight of debt.

Whatever gloss the Chancellor can slap on, whatever the statistical sleights of hand, this will be a Primark Budget for a Primark Britain, and, for the government, the final uncoiling descent from the so-called "prudence" years.