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.