11 April 2008
Alistair Darling was forced this week to defend his public spending and fiscal forecasts, as independent economists and politicians warned they lacked credibility.
The criticisms followed the International Monetary Fund's decision to slash its UK growth forecast.
The chancellor insisted that the Treasury's forecasts, outlined in his maiden Budget just last month, were sound. But the IMF predicted that the UK economy would grow by just 1.6% in 2008/09 and 2009/10 because of the continuing global economic turmoil.
The figure, contained in the IMF's latest World Economic Outlook published on April 9, is well below Darling's prediction of at least 1.75% growth this year and 2.25% next.
If it is correct, a large hole would open up in the public finances. Borrowing is already set to soar to £43bn this year to offset lower than anticipated tax receipts, and Whitehall departments will experience a substantial spending squeeze from now until 2011.
Any further downturn in forecast revenues would upset Darling's fragile fiscal balancing act, forcing him either to rein in spending, increase borrowing even further or put up taxes.
The chancellor's insistence on April 9 that his forecasts were robust was greeted with scepticism. Gemma Tetlow, a senior research economist at respected independent think-tank the Institute for Fiscal Studies, told Public Finance that the Treasury's fiscal rules would come under severe strain if the IMF were right.
While the fund's figures did not diverge significantly from the government's in the current financial year, they would force painful decisions in 2009/10 and beyond if correct, Tetlow warned.
'With an election looming in 2009 or 2010, it seems unlikely the chancellor will want to introduce tax-raising measures in the next Budget,' she told PF.
'But with lower growth, there would be further pressure on the spending plans, and there is very little headroom to accommodate any additional borrowing [within the sustainable investment rule].'
Under that rule, public sector net debt may not exceed 40% of gross domestic product. The chancellor's existing prediction is that PSND will reach 39.8% in 2010/11. Any significant further increase in borrowing would breach that ceiling.
Liberal Democrat Treasury spokesman Vince Cable said Darling needed to 'be honest' with the country about the state of the public finances. 'It is now very clear that the government's economic forecasts are seriously out of line. We need a reworking of its Budget assumptions with some honest numbers for expanding borrowing and debt.'
But Darling said earlier that the UK still had a 'strong' and 'resilient' economy that could withstand the fallout from the global credit crunch.
'The IMF has downrated every country's growth forecast, and it's in light of what's been happening in the world economy. However, they have lowered their expectations in relation to us by less than other countries and they still predict growth,' he said.
'We do have a very strong economy; it's proved remarkably resilient over the years… so I remain optimistic that, provided we stick to the course we've set, provided we do the right things, our economy will continue to grow just as it has done over these past 11 years.'
The chancellor's optimism was, however, at odds with the views expressed by the Labour-dominated Treasury select committee when it published its report on the 2008 Budget on April 7.
Its members questioned the Budget forecasts, warning that the government might not have given sufficient weight to the ongoing turbulence in the world's financial markets.
John McFall, the committee's chair, said: 'The government's own forecasts show that it will be extremely tight as to whether, in future, it will meet the sustainable investment rule.
'There are significant downside risks to the economy, and therefore potentially to tax receipts,' he said.
'As such, the government is going to have to be extremely vigilant in how it manages the public finances if it wishes to maintain its so far clean record in meeting its own fiscal rules.'
But a Treasury spokesman insisted it stood by the Budget forecasts.
'We set out our forecast for the UK economy in the Budget, and we stand by that. The Treasury has an excellent forecasting record and we've outperformed the consensus of independent forecasters over the past 10 years,' he said.
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