Darling bounces UK deep into debt

Published on Wednesday 22 April 2009 21:58

NOT a debt mountain but a range of peaks; not a V-shaped recovery but a trampoline bounce: Alistair Darling strove to make a budget of fantastical figures sound like business as normal yesterday. But the only normal sound you could hear was the snapping springs on that trampoline.

This was the Budget that might spare us Depression. But is the one that finally marked the end of New Labour. This flatline budget speech gave every sense of a government that has run out of road. As a result, the real 2009 Budget has still to come. The sense of tough decisions delayed hung over this entire package.

How telling that, on no less than three occasions, he invoked the mantra that the world economy would double over the next 20 years. It is getting through the next 20 weeks that is Britain's problem.

The fiscal position is so bad that, despite severe recession and soaring unemployment, the Chancellor was reduced to modest measures and a few gimmicks.

Seldom before has the case for Keynesian stimulus been so great. But the government has borrowed to the back of beyond and has almost nothing to spare. And this is what in retrospect will be seen as Labour's greatest policy failure.

We are now at the endgame most feared of Labour governments – debt, delusion and disillusion. Gone were all those references to prudence and the ritualistic incantations of Golden Rules so beloved of his predecessor. The entire decade-old apparatus of Gordon Brown budgets has been swept away.

Mr Darling was obliged to slash his previous forecast for the economy – flipping from a mild downturn of 1.25 per cent – 0.75 per cent five months ago to a plunge of 3.5 per cent in the biggest correctional word-eating ever forced on a British chancellor.

He confirmed the worst fears of financial markets by announcing a budget deficit this year reckoned at 175 billion – double the figure envisaged in the Budget last year and the highest as a percentage of national income of any G20 country.

And this is no freak year: the deficit peaks stretch out to the far horizon, with net debt as a percentage of national income rising out to 2013-14.

But it was not these horrors that brought forth the biggest gasps in the Commons yesterday.

The cries of astonishment came when he announced his forecast for economic growth in the years ahead.

After a contraction of 3.5 per cent this year, the Chancellor calmly announced the economy will recover to growth of 1.5 per cent in 2010 – and to 3.5 per cent in 2011.

It was this second forecast that led David Cameron to remark: "This wouldn't be a U-shaped recovery, this would be a trampoline recovery."

The fact is the first forecast is mildly optimistic. The second is off the scale.

The Treasury believes domestic demand in that year will recover to between 2.5 and 3 per cent, and household consumption will spring back to growth of between 3 and 3.5 per cent. Even by the recent standards of demented dart-throwing that has come to mark the economic forecasting industry, this is going some.

It assumes the financial crisis is over. It assumes the problem of toxic debt is miraculously cured. And it makes no allowance for the historical fact that recessions sparked by financial crashes are more intense and last longer.

Bouncing back after the stunning loss of $50 trillion in the value of assets round the world is just not what the global economy is likely to do, still less the UK, particularly under that mountain of crushing debt. Of a credible plan to tackle the growth in public spending and achieve big savings there was just no sign. Indeed, the public spending party still goes on, as if nothing has changed. Even after the 15 billion of "efficiency savings" public spending is still on course to rise in real terms by 0.7 per cent.

What a private company would not give to be shielded from the economic storm by the prospect of a continuing real terms rise in its revenues while the world about it crashed.

What Darling seems loathe to admit, even after all the figures he gave of the global recession yesterday, is how much everything has changed.

And it is the refusal to recognise this – and to take the opportunity to show leadership and a change of course – that made much of Darling's speech yesterday sound like "same old".

What was glaringly absent was the sense of a government willing to take a grip on the public finances and get us out of the debt hole.

The result is that the government now has a colossal debt funding task on its hands. It has to undertake sales of gilt-edged stock this year of 220 billion – way above market forecasts. The cost of bailing out the banking system has been bigger than expected.

Even without any further mishaps in the global economy, this is an enormous undertaking and may raise questions as to whether the UK will retain its AAA credit rating. Lose that, and the cost of funding this debt could rise very sharply.

But there were useful measures in the Budget that should help mitigate the downturn.

&#149 The widely trailed 2,000 car-scrap scheme should boost new car sales.

&#149 Help for the young unemployed is well targeted.

&#149 The rise to 40 per cent in tax relief to businesses on capital spending is worth 1.6 billion.

&#149 All told, the benefit to business of deferring business-rate payments, the car-scrap scheme, a fund for investing in young start-up companies, and various other smaller initiatives is more than 3.3 billion.

&#149 And the lift in the Isa annual savings ceiling to 10,200 should encourage savings and is long overdue.

For now, the government lacks the political will and strength to seriously tackle the debt hole we are in. Yesterday was a duck and a dive – the best the Chancellor could do. The real 2009 Budget is still to come.

BUDGET 2009: FULL COVERAGE

• Slideshow: The Budget in graphics

• Britain to sink into 1 trillion debt hole next year

• Darling throws petrol bomb at recovery hopes

• Analysis: Chancellor's projections for growth a real gamble

• Swinney says cuts will lead to loss of 9,000 jobs

• Energy: Boost for North Sea fields is welcomed but detail needed

• Whisky: Few cheers as duty rise comes at the worst time, say whisky leaders

• Leader: Wait-and-see Budget shows lack of leadership

• Cartoon by Iain Green