23 January 2009
By Tash Shifrin
Both the public finances and the state of the economy have 'deteriorated significantly' in the months since the Pre-Budget Report, economists have warned.
The November PBR set out a programme of public sector efficiency savings, a £14bn reduction in capital allocations and a £37bn spending squeeze from 2011/12 to pay for record government borrowing and the fiscal stimulus package aimed at shoring up the economy.
But data released this week by the Treasury showed that the economic downturn is now widely expected to be far more severe than Chancellor Alistair Darling predicted. Figures from the Office for National Statistics also showed the public finances worsening as the government's intervention in the banks began to have an effect.
At the end of December, public sector net debt hit 47.5% of gross domestic product, the ONS figures revealed. Even excluding the intervention in the banking sector, this figure was 40.4% – above the level formerly specified in the government's fiscal rules.
Net borrowing for the financial year to date was £71.2bn, almost double the £37bn figure for the same period last year.
The ONS statistics also revealed that recapitalisation of the banks accounted for more than half the £44.2bn net cash requirement for December, which was £27.5bn up on last year.
Gemma Tetlow, senior research economist at the Institute for Fiscal Studies, said: 'Overall, on current trends for receipts and spending, the Treasury is on course to modestly overshoot its November forecast for borrowing.'
She added that the £22bn used largely to recapitalise the Royal Bank of Scotland could be considered 'a down-payment on the eventual much larger impact of taking RBS on to the government's balance sheet'.
Charles Davis, economist at the Centre for Economics and Business Research, warned that there was now a consensus among economists that the Treasury had been 'too optimistic in its forecasts' on the future of the economy.
He highlighted a comparison of independent economic forecasts, published by the Treasury on January 21, which showed that economists expected GDP to shrink by 2.4% this year – with the harshest estimates at 3.2% – compared with Darling's forecast of 0.75% to 1.25%.
Davis said: 'Some people are harking back to the 1930s and it's not an unreasonable view. The scale of the challenge is fairly profound. Things have deteriorated significantly over the past few months.' He added that further spending cuts could be in the offing if public sector debt continued to rise, as the government would 'have to convince the markets there was a credible way to pay that off'.
Concerns over the public finances have been increased by new government interventions in the banking sector.
City minister Lord Myners said the scheme announced on January 19 to insure the banks against big losses on 'toxic' assets would last at least five years and could go on for nine, prompting anger from opposition politicians.
But the Treasury said details of the programme, dubbed the Asset Protection Scheme, would not be announced until the last week of February.
Meanwhile Liberal Democrat leader Nick Clegg and Commons Treasury committee chair John McFall both called for full nationalisation after shares in RBS tumbled further. McFall said ministers could use a nationalised RBS and Lloyds TSB to 'restart the flow of credit'.
Davis said the government's banking interventions had added even more uncertainty to the economic situation.
'The markets haven't reacted well and there's a knock-on effect from sterling being affected. Worse could be to come.'
PFjan2009
