The great borrowing binge goes on
Roger Bootle, economic adviser to Deloitte, gives his Budget
predictions
- Chancellor Alistair Darling faces the unenviable task in his
second Budget of trying to offer the economy some much-needed
support, whilst at the same time reassuring the markets that the
public finances will eventually return to health. He is unlikely to
achieve either aim convincingly.
- If Mr Darling thought that his first Budget last year was a
difficult one, he cannot have imagined just how much worse the
situation would be a year later. For a start, he will have to
concede that the economy will now contract much more sharply this
year than he previously expected, while next year's recovery may
also be weaker.
- Needless to say, this will have extremely adverse effects on the
already disastrous state of the public finances. But there are
growing signs too of a structural hole emerging in the fiscal
position, perhaps reflecting the tax-unfavourable shape of growth.
Meanwhile, Mr Darling may have to make some allowance for the cost
of the measures to support the banking sector.
- Overall, we expect the official forecasts for public borrowing
to rise by a total of some £250bn over the next five years compared
to those presented in the PBR. As a result, the ratio of debt to GDP
will rise above 70%. Our own forecasts for both borrowing and debt
are even higher.
- Against that background, the scope for a further boost for the
economy in this Budget is severely limited. Whilst we expect a small
giveaway in the next year or two, this is likely to turn into a net
fiscal tightening further ahead. Possible measures include the
bringing forward of further capital spending plans and extra help
for the unemployed. A further rise in the top rate of income tax or
in VAT could help to bring borrowing back down somewhat further
ahead.
- But the Chancellor is unlikely to provide much reassurance over
the longer-term health of the public finances. Without further
action, it could now be a decade before public sector debt starts to
fall as a proportion of GDP and a generation or more before it
returns to current levels.
- None of this means that the UK government is in danger of
bankruptcy. Neither do we expect the prospect of huge amounts of
issuance to push bond yields sharply higher in an environment of
very low interest rates and inflation. But it once again underlines
the need for a huge fiscal consolidation as and when the economy
finally emerges from this recession.
