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The state of the nation

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27th Apr 2009
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Rebecca Benneyworth takes look at some of the economic claims and worries surrounding last week’s Budget.

The chancellor did admit now that the downturn is worse than he had expected when he presented the Pre Budget Report in November. He described it as the most serious economic downturn in over 60 years, and referred us back to the last time Britain was in such a state when he criticised the government for doing too little too late. This, he said, allowed a serious downturn to move into a depression, but this government would not let that happen again.

Heeding the words of the governor of the Bank of England less than a month ago, the chancellor did not try to buy or spend his way out of the current economic conditions, but he said, we would earn our way out of it. Music to our ears? His projections for Britain’s economy are based on a doubling of the world’s economy in the next 20 years, and his hopes that we will be able to take a major share in that growth, pulling by sheer force, our economy back to health.

But is that a reasonable assumption in itself? The growth (if indeed the figures are correct) will not be from the mature Western economies, surely, but from the emerging economies. Will not they seek to satisfy growing demand from home? Maybe it is a reasonable assumption that we could participate in that growth sufficient to bring things around – but most voters will not be prepared to wait two decades to see things improve. Maybe Mr Darling was giving us a clear idea that it really could be that long before the good times are back?

However, this is not what he promised for the UK economy. I found the claims that Britain would return to growth within a year, and finish 2010 set back on the sort of growth we benefited from in the early 21st Century implausible. GDP will shrink by around 3.5% this year – this is widely accepted, although the figures published the day after the Budget seemed to give the lie even to this pessimistic figure. After shrinking by 1.6% in the fourth quarter of 2008 – regarded as an unprecedented quarterly result – the economy fared even worse in quarter 1 of 2009 suffering a reduction of 1.9%.

It is possible that even 3.5% reduction in GDP is now overly optimistic. The potential for 1.25% growth in 2010 and 3.5% thereafter with a target rate of 2.75% is frankly doubtful. These growth figures, which we have seen for the last few years, were, we now know based on an unsustainable financial services sector, which is no all but bankrupt. Where will this growth come from then? Which sector would you back to “earn our way out of the downturn”?

And of course they will have to earn a great deal to even undo the damage and start to turn the supertanker that is the UK economy. With high earnings, we know come high tax burdens. The second claim I found deeply worrying in Mr Darling’s assessment of the economy was that our deficit would halve in the next four years.

Some historic statistics – provided by my fellow speaker at the ICAEW London branch Budget Breakfast, Warwick Lightfoot. Warwick was economic adviser to several Tory Chancellors, and is one of the few economic analysts who can make a talk on the economy into a 'must see' event.

He quoted our budget deficits at 10% of GDP annually within four years. However in the recession of 1975-76 this only reached 8% of GDP, in 1982 5.5% of GDP, and in the 1990’s 7% of GDP. In 2009-10 it will reach 12.5% of GDP. By 2015 our stock of National Debt is projected to reach 80% of GDP. How is that a 'halving' by any standard of measurement? I guess the rate of increase will go down, but that seems to be about it.

So how do we pay this back? We might consider turning to the IMF for a bail out, but this route to solvency will not serve us this time around. First we would need a stable banking sector as one of the primary conditions. Ours is as stable as a three legged stool with a broken leg. The next problem is that we would be looking for around $500 billion, and the IMF only has a total of around $300 billion of funds in total.

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By edavidelliott
30th Apr 2009 16:57

Distress signal more than appropriate
Presumably you were aware that the flag was upside down? How many are aware of the significance?
With "Mad on borrowing" (anagram of "I am Gordon Brown" and "Dear Darling" running the ship can we realistically expect to refloat before the ship completely breaks up, if it has'nt already!

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By yardleystar
29th Apr 2009 12:33

Gordon's promise
Gordon Brown promised to redistribute wealth and he's done a good job redistributing mine, but I don't seem to be getting anyone else's and will pay more tax for the privilege.

The basic problem is the lack of policing of the financial sector and allowing banks to act as they please.

This is the first time in history where the Government has been in charged of monetary supply - with the Bank of England, Treasury and nationalised banks all reading from the same song sheet. If they can't make economic policy work now, it never will.

I don't pretend to have the answers, but it seems communism doesn't work a la Russia and China and capitalism doesn't work a la US and Europe. They are all artificial localised systems imposed on global economies - perhaps we ought to stop applying artificial controls and be more laissez faire and see where that takes us rather than bankers and politicians with greedy agendas.

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By kerpang
29th Apr 2009 12:14

Of course it is possible to earn our way out but....
That requires hardwork and dicipline. The country has flourised (kind of), despite successive governments and EU bureaucracy/waste due to its people, heritage and system.

Although I fully appreciate that this would be a very steep uphill battle due to the attitudes of a good chunk of the society where they think the state owes them a living and the politicians are happy to go along with that.

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By User deleted
27th Apr 2009 19:53

Brief comment
A reasoned and sensible commentary - unlike the left leaning pro HMRC Simon Sweetman.

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