ANALYSIS:THE FIGURES announced in the budget are enormous, however they are expressed. This financial year, the UK treasury expects tax revenues to fall short of public expenditure by £175 billion (€194 billion) or 12.4 per cent of national income.
Of this total, the treasury admitted that nearly all of it – £140 billion or 9.8 per cent of national income – will be persistent. The reason the cyclically-adjusted or persistent part of borrowing looks so bad is because the treasury has been forced to admit that 5 per cent of Britain’s national output is gone for good. Although any talk by ministers of a big fiscal stimulus has disappeared, repairing the deep hole in the public finances without choking off growth will take years – until 2017-18 according to the budget.
Such has been the loss of tax revenues from corporate profits and incomes that the level of government receipts as a share of national income will fall to its lowest level in nearly 50 years. Borrowing will exceed £100 billion for four years.
Public-sector net debt will rise to nearly 80 per cent of national income, twice the level the government thought was an absolute maximum as recently as last November.
The initial reaction in the gilts market was not encouraging. It gave a thumbs down to the scale of the borrowing with yields on 10-year government bonds rising 0.15 percentage points.
In weeks, months and years to come, the markets are likely to focus on the credibility of the government’s deficit reduction plan. Darling aims to bring borrowing down from 12.4 per cent of national income in 2009-10 to about 1.2 per cent in 2017-18, an amount equivalent to £160 billion in today’s prices.
For all the fuss before the budget about soaking the rich, the 50 per cent income tax rate announced yesterday, and withdrawal of rich people’s allowances represent £2 billion of that £160 billion. If the rich are not going to be paying the bill for the borrowing spree alone, where will the pain fall? The answer is spread between the most sustained public spending squeeze in recent British history including savage cuts in capital expenditure; modest tax rises for everyone; and the assumption of faster economic growth.
Tax rises provide roughly £25 billion of the £160 billion consolidation, with cuts in spending plans since last year’s budget giving another £60 billion.
This allows the government to assume tax receipts rise back to more normal levels and provides a decade in which Darling can assume public spending grows slower than the economy, reducing public spending as a share of national income to 39 per cent in 2017-18. Is this credible? At the moment, doubts must be raised because all the chancellor has done is to pencil-in slower public spending growth without saying what services will be cut. – (Copyright The Financial Times Limited 2009)
