26 September 2008
Chancellor Alistair Darling is facing major challenges as he increases borrowing in an effort to maintain public spending, senior economic analysts have told Public Finance.
'Borrowing is going to rocket. Our forecasts put borrowing at £60bn for this financial year and up to £90bn for the year after,' said Charles Davis, an economist at the Centre for Economics and Business Research.
Simon Kirby, research fellow at the National Institute for Economic and Social Research, criticised the Treasury for poor contingency planning. 'There was no one saving up for this rainy day. We are having the thunderstorm and there are no savings,' he said.
In his Pre-Budget Report, expected at the end of October, Darling will have to cope with lower than expected tax receipts from a slowing economy and 'giveaways', which threaten to shatter the sustainable investment rule established by Labour in 1998.
Darling told the Labour Party conference on September 22 that previously low levels of national debt would enable the government to 'let borrowing rise to support the economy and families now when they need it most'.
But the chancellor insisted that discipline in public finances was essential. 'I will set out this autumn how I will continue to deliver sound public finances,' he said.
Gemma Tetlow, a senior research economist at the Institute for Fiscal Studies, told PF that the income tax rebate announced in May, the postponement of the increase in fuel duty and the stamp duty holiday amounted to a £3.6bn giveaway on forecast income.
'This, on top of a poor show of receipts, means that borrowing could come in around £65bn, significantly higher than they were forecasting. This would bring the deficit to 4.4% of national income, which would be the highest level since before Labour came to power.'
Tetlow said the medium-term question for the chancellor was whether the economy would 'bounce back' quickly.
'If this is going on all year [they] will have to look at the extent to which they get revenue from the financial services sector. If it is more fundamental, they might have to make changes to the tax system,' she said.
In an interview in Manchester, Darling ruled out tax increases. It would be 'nonsense', he said, to take money out of the economy, penalising businesses already under pressure from the crisis.
Davis at the CEBR and Kirby at the NIESR agreed. But, said Davis, it was a 'challenging outlook' for Darling. 'From 2009/10 onwards some tough decisions are going to have to be made,' he said. He predicted lower receipts from corporation tax as company profits were hit, and a drop in stamp duty income, which fell 44% in the first six months of 2008.
Kirby said he expected spending plans to remain unchanged, but that the Treasury would revise down their expectations for receipts over the coming years. 'The question is how far down – they are going to have to be reasonably dramatic.'
As a proportion of gross domestic product, the Office for National Statistics said public sector net debt was 43.3% at the end of August when the debts of the nationalised bank Northern Rock are included.
However, under Gordon Brown's sustainable investment rule – that debt should not rise to over 40% of national income – Northern Rock debt is considered a temporary liability and discounted when calculating the rule. Excluding Northern Rock, the figure stood at 38.8%.
The level of GDP might also be revised upwards in October when statistics are released recalculating the contribution made to national income by the financial services industry.
Chief Secretary to the Treasury Yvette Cooper told a fringe meeting at the Labour conference that the crisis in the financial markets and rising fuel prices had created a 'different climate'. She added: 'With these kind of economic challenges I think it's right we increase borrowing this year in response to that to maintain public spending… not to simply put up taxes.'
In his speech to the Labour conference, Gordon Brown hinted that spending could be hit by the economic slowdown, with a need to ensure value for money.
'There are tough choices and I have to say… there are going to be tougher choices we will have to make and priorities we will have to choose,' he said.
However, he made several spending pledges, including free prescriptions for people suffering from cancer and with long-term conditions.
PFsep2008
