Wednesday, March 12, 2008

Whistling In The Dark

Somewhere out in the dark everything's going to be fine

So no tax cuts, and the Major's not at all happy about the extra levy on "refreshments", but overall a boring budget from a boring man.

At least that's the spin.

But on closer inspection, the Budget's fiscal projections are worrisome.

The basic proposition from Darling and Yvette Cooper is that while the current economic turbulence will hit tax revenue and push up borrowing in the short-term, it's nothing that can't be contained within the existing fiscal rules. And by the time we get to 2011-12, a "mere" £4bn of tax increases (compared to Budget 2007) will be enough to rebalance the books.


Point one. Borrowing this year and next is substantially higher than forecast in last year's Budget- an extra £23bn, taking total borrowing to £81bn over the two years.

Point two. The Treasury's GDP forecast is more optimistic than the consensus. According to the Budget papers, the average independent growth forecast is now on 1.6% for 2008, and 1.8% for 2009. Against that, the Treasury is on 2% for 2008 and 2.5% for 2009. That may not sound much of a gap, but depending on whose ready reckoner you believe, it could mean an additional £10-15bn borrowing over the two years, taking total borrowing up towards £100bn.

Point three. The outlook is getting darker by the day. Here's how the average of independent GDP forecasts has been moving for 2008:

Given the innate caution of mainstream forecasters, and the unfolding US recession, who'd want to bet there's not more downward revision to come.

Point four. What happens if we don't revert back to 2.5%pa "trend" growth assumed by HMT for 2009-10 onwards? The way the banks have been zapped by the credit blow-out, that seems an extraordinarily optimistic assumption. If instead we had a jobless joyless 1.5%pa that would mean another c£10bn additional borrowing every year.

In summary, the outlook for government borrowing is grim, and almost certainly worse than the Treasury forecast. Darling and Cooper are whistling in the dark.

And where does that leave us in terms of tax?

Yup, that's what we think too. Re-dom as soon as poss.

PS HMT has finally released its updated long-term fiscal projections. We'll be taking a close look at them so we can try to answer Evil Auntie's question about how we will ever service- let alone repay- all this debt our rulers are running up.

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