Darlings bleak outlook tempered by improved tax take

21 Feb 08
Chancellor Alistair Darling's forecasts for the public finances are too optimistic and painful choices are needed to get them back on track, despite higher-than-expected tax receipts, leading economists warned this week.

22 February 2008

Chancellor Alistair Darling's forecasts for the public finances are too optimistic and painful choices are needed to get them back on track, despite higher-than-expected tax receipts, leading economists warned this week.

The public finance statistics for January delivered some much-needed good news in what was otherwise a difficult week for the chancellor, following his decision to nationalise Northern Rock.

The figures from the Office for National Statistics, published on February 20, showed corporation tax receipts up 22% on the take for January 2007.

This unexpectedly strong showing means public sector net borrowing for the financial year until January 31 stands at £26.5bn, and the public sector current budget is in deficit by £8.5bn.

These results put Darling back on track to meet the public finance forecasts in his October Pre-Budget Report, when he pencilled in total borrowing of £38bn and a total deficit of £8.3bn for 2007/08.

But Doug Godden, the CBI's head of economic and fiscal policy, told Public Finance that although the figures give Darling breathing space in the current financial year, they do not alter the bleak outlook for the UK public finances in the years ahead.

'These figures don't change the underlying situation for next year or the year after, because we're not yet seeing the full impact of the economic downturn or the squeeze on the finance sector,' Godden told PF.

'The government's forecast figures are assuming a robust upturn in the economy from 2009, and most economists just don't see that happening.'

In his PBR, Darling predicted borrowing of £36bn in 2008/09 and £31bn in 2009/10, but Godden said he expected the figure for both years to be nearer the £40bn mark.

He warned that the government's assumptions about tax receipts in the future were 'optimistic', and said it still needed to 'tighten fiscal policy', particularly in relation to spending, to get the public finances back on an even keel.

Godden's view chimes with that of the respected economic think-tank the Institute for Fiscal Studies, which predicted borrowing of a similar order in its 'green budget' last month.

Gemma Tetlow, a senior research economist at the IFS, told PF the latest public finance figures meant Darling was now likely to meet his PBR forecasts.

But she highlighted lower corporate profits growth, a weakening housing market and continuing stock market volatility as factors that threaten Darling's forecasts.

'It is good news for this year, but that does not change the underlying picture for the period ahead,' Tetlow said.

The ONS statistics also put overall public sector net debt at £512.4bn, which is equivalent to 35.4% of gross domestic product.

But this figure does not include Northern Rock's liabilities: the ONS has classified these as public debt and intends to add around £100bn to public sector net debt to reflect that.

An ONS spokesman told PF it was not possible to say when that would happen. 'As soon as we can say, we will, but we can't give a date at the moment. We are still waiting for the data we need [to include the liabilities].'

The IFS said that when they were included in the public finances it would 'shatter' the government's sustainable investment rule, under which PSND should be less than 40% of gross domestic product. When Northern Rock is included, the proportion is likely to be closer to 45%.

Tetlow called on the government to publish debt figures that show the position with and without Northern Rock's liabilities, as it is impossible to know at this stage the nationalisation's impact on the public finances.

'Whether or not tax and spending plans will need to change in response to nationalisation should depend only on the long-term impact of Northern Rock on PSND, which remains uncertain,' she said.

Darling announced the nationalisation on February 17 after concluding that none of the private sector bidders offered sufficient value for money to the public purse. He said that protecting the interests of the taxpayer was his paramount concern.

'Under public ownership, the government will secure the entire proceeds from the future sale of the business in return for bearing the risks in this period of market uncertainty,' he said.

PFfeb2008

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