After the splurge, the reckoning. Like every other Labour administration before them, this lot have blown the public finances to smithereens. Ahead of tomorrow's Budget let's just remind ourselves of the grisly facts:
- Spending explosion- the chart above is taken from the TPA's Budget briefing and shows the OECD's fix on government spending in the UK compared to the OECD average. So while other governments have exercised real prudence, ours has spent money like a lottery winner who's been told he only has six months to live. We are now the profligate outlier in a world that is turning very nasty indeed.
- Wishful thinking- the government has substantially underestimated borrowing in each of the last six years. Last year's budget forecast 2007-08 borrowing at £33bn: the out-turn is likely to be more like £43bn, an overshoot that amounts to around £400 for every single household in Britain. And that's despite the fact that growth has been strong (around 3%)
- Debt lies- as we've blogged many times (eg here), the real national debt is much higher than Labour admits. They say it's just over £0.5 trillion, whereas once we include unfunded public sector pensions, off-balance sheet PFI debt, and various other liabilities, the true figure is over £1.8 trillion. Or 130% of GDP. Or £74 grand per household. And remember, that undeclared debt is growing by around £80bn pa (the figure you should mentally add to Darling's announced borrowing total).
According to a widely quoted IFS analysis, Darling will need to raise tax by £8bn pa to meet their Golden Rule. That's 2p on income tax. And actually, it could be a lot worse than that. The IFS forecast assumed a fairly mild economic slowdown - 1.75% growth in 2008, and a recovery to 2.25% in 2009.
But given the worsening credit crunch, and the way the US economy is sagging, growth is unlikely to keep that track. In their pessimistic case, the IFS assumes UK growth slipping to just 0.5% in 2008, and 1.75% in 2009, in which case public sector net borrowing would double to £68bn by 2011-12.
So what will Darling do?
All the talk is of tax increases- "green" taxes, booze taxes, non-doms taxes, stamp duty- if it moves it will be taxed. But of course, as my old A Level economics book tells me, higher tax means lower economic growth, which in turn depresses other tax receipts.
Raising tax in the face of recession has never been an especially attractive option, even when driven by fiscal necessity. Maggie got away with it in 1981 (see this blog), but only at the cost of entering the all-time lexicon of evil. Do we really think Darling is up for that?
More likely he'll assume the problem away: he'll simply ignore the grim economic prospects staring the rest of us in the face. Following a well-worn script, he'll massage up his forecast of tax receipts, massage down his forecast of expenditure, and tell us Britain is better placed than any other country in the world to weather the international storms. And he stands ready to... well... do something... once they work out what that might be.
PS Good Liam Halligan article on Budget here