27 February 2009
By Tash Shifrin
Chancellor Alistair Darling could use his April Budget to launch a further £20bn fiscal stimulus, economists have predicted.
The Institute for Fiscal Studies suggested that this would bring the UK’s attempts to tackle the recession into line with those of other major economies. Such a package could prolong the pain in the public sector, which is already set to bear the brunt of plans to restore the public finances when the economy recovers.
In the Pre-Budget Report, Darling set out £20bn of fiscal stimulus measures but the economy has worsened since then. Figures released by the Office for National Statistics on February 25 provided the latest gloomy indicator, confirming a 1.5% fall in gross domestic product in the last quarter of 2008.
IFS deputy director Carl Emmerson said a study of the fiscal stimulus packages introduced across the G20 economies, produced by the International Monetary Fund, had shown that the size of the UK’s PBR boost during 2009 was around the average.
But he told Public Finance: ‘If the Treasury now thinks the recession will be longer, it could well justify a fiscal stimulus package that lasts for longer. At the moment, the UK looks like a bit of an outlier.’
Emmerson said he ‘wouldn’t be surprised’ to see the government bring forward more capital spending or put more money in people’s pockets through raised benefits or tax cuts in the Budget.
The IMF report showed most major economies had adopted a fiscal package worth ‘about 1.4% of national income this year and next’, Emmerson said. Darling ‘could easily justify 1% to 1.5% of GDP’ — about £20bn — in a new fiscal package. This would add to public borrowing, already £67.2bn at the end of January.
Emmerson said the outlook set out in the Bank of England’s February Inflation report would add £22bn to borrowing in 2009/10, and £30bn in 2010/11, because of reduced tax receipts and unemployment.
The ONS has also decided to classify the Royal Bank of Scotland and Lloyds Banking Group as public bodies – a move that could take public sector net debt to £1.5 trillion, it said.
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