By Tash Shifrin
22 October 2009
Economists have predicted that only ‘extreme’ options could fill the huge hole in the public finances, such as a 7p income tax hike, a five-year public sector pay freeze and savage service cuts.
The National Institute of Economic and Social Research set out what it described as a ‘menu of options’ on October 21, a day after the Office for National Statistics released the latest public finance figures.
These showed net borrowing of £14.8bn in September, bringing the total for the year to date to £77.3bn. At the end of September, net debt was £824.8bn – equivalent to 59% of gross domestic product.
The Treasury’s tax income continued to fall, with receipts in September 6.3% lower than in the same month last year. The tax take for the first half of the financial year was 10.3% lower than in the same period in 2008/09.
The NIESR warned that the UK faced both a structural budget deficit of 6% of GDP – because of permanent damage to the economy from the financial crisis – and a build-up of debt, which could reach 93% of GDP by 2015.
‘Raising the standard rate of income tax by 7p or widening the VAT base by 10% of spending would both raise 2% of GDP revenue, as would a five-year public sector pay freeze, or a 10% cut in services,’ the institute’s quarterly forecast said.
NIESR economist Simon Kirby told Public Finance these suggested measures seemed ‘extreme’ but served to highlight the scale of the deficit. ‘Each will only get us a third of the way there,’ he said.
The think-tank also believes there is ‘a case for extending working lives by three years in order to reduce the structural deficit by 3% of GDP’.
Kirby added: ‘A combination of tax increases, spending cuts... and increasing working lives is probably the best approach. We’re not advocating doing it immediately, because we still need the economy to recover.’
In a speech on October 21, Chancellor Alistair Darling insisted that government borrowing was still the best way to encourage recovery in the long term.
Withdrawing government support would ‘put the recovery at risk and abandon people facing unemployment’.
But he stopped short of backing Bank of England governor Mervyn King, who called the previous day for mega-banks to be split to prevent them becoming too big to fail. Darling said: ‘We cannot have a regulatory regime that excludes the possibility of failure.’
As the public sector braces itself for the coming squeeze, the ONS figures revealed that spending has already been cut back from Budget projections.
The Institute for Fiscal Studies noted that while spending for the financial year to date was 4.7% up on the same period last year, this was well below the 7.5% increase in central government spending set out in the Budget.
IFS senior research economist Gemma Tetlow said that if the lower growth in public spending continued for the rest of the year: ‘This element of spending would be about £10bn lower than the Budget forecast’.
The NIESR expects the economy to resume growth in the fourth quarter of the year. But it predicted that the recovery would be based on growth in exports, with consumer spending continuing to fall. This shift in the economy would make restoring the public finances ‘particularly painful’, it said, because exports were relatively ‘tax-poor’.
‘Whereas the Treasury is forecasting a fall in public sector net borrowing to 5.5% of GDP in 2013/14, our forecast shows borrowing at 7.7% in that year,’ it added.
22 October 2009
Economists have predicted that only ‘extreme’ options could fill the huge hole in the public finances, such as a 7p income tax hike, a five-year public sector pay freeze and savage service cuts.
The National Institute of Economic and Social Research set out what it described as a ‘menu of options’ on October 21, a day after the Office for National Statistics released the latest public finance figures.
These showed net borrowing of £14.8bn in September, bringing the total for the year to date to £77.3bn. At the end of September, net debt was £824.8bn – equivalent to 59% of gross domestic product.
The Treasury’s tax income continued to fall, with receipts in September 6.3% lower than in the same month last year. The tax take for the first half of the financial year was 10.3% lower than in the same period in 2008/09.
The NIESR warned that the UK faced both a structural budget deficit of 6% of GDP – because of permanent damage to the economy from the financial crisis – and a build-up of debt, which could reach 93% of GDP by 2015.
‘Raising the standard rate of income tax by 7p or widening the VAT base by 10% of spending would both raise 2% of GDP revenue, as would a five-year public sector pay freeze, or a 10% cut in services,’ the institute’s quarterly forecast said.
NIESR economist Simon Kirby told Public Finance these suggested measures seemed ‘extreme’ but served to highlight the scale of the deficit. ‘Each will only get us a third of the way there,’ he said.
The think-tank also believes there is ‘a case for extending working lives by three years in order to reduce the structural deficit by 3% of GDP’.
Kirby added: ‘A combination of tax increases, spending cuts... and increasing working lives is probably the best approach. We’re not advocating doing it immediately, because we still need the economy to recover.’
In a speech on October 21, Chancellor Alistair Darling insisted that government borrowing was still the best way to encourage recovery in the long term.
Withdrawing government support would ‘put the recovery at risk and abandon people facing unemployment’.
But he stopped short of backing Bank of England governor Mervyn King, who called the previous day for mega-banks to be split to prevent them becoming too big to fail. Darling said: ‘We cannot have a regulatory regime that excludes the possibility of failure.’
As the public sector braces itself for the coming squeeze, the ONS figures revealed that spending has already been cut back from Budget projections.
The Institute for Fiscal Studies noted that while spending for the financial year to date was 4.7% up on the same period last year, this was well below the 7.5% increase in central government spending set out in the Budget.
IFS senior research economist Gemma Tetlow said that if the lower growth in public spending continued for the rest of the year: ‘This element of spending would be about £10bn lower than the Budget forecast’.
The NIESR expects the economy to resume growth in the fourth quarter of the year. But it predicted that the recovery would be based on growth in exports, with consumer spending continuing to fall. This shift in the economy would make restoring the public finances ‘particularly painful’, it said, because exports were relatively ‘tax-poor’.
‘Whereas the Treasury is forecasting a fall in public sector net borrowing to 5.5% of GDP in 2013/14, our forecast shows borrowing at 7.7% in that year,’ it added.
