BUDGETS these days have a short shelf life. After the immediate news rush and the instant analysis, the second thoughts soon crowd in, bringing with them the discovery of buried tax nasties. By the end of the week the borrowing projections come under question and the economic forecasts look decidedly dodgy.
Last week's effort conforms to this pattern. But it differs in two key respects. First, the scale of borrowing and debt casts a very long shadow. According to the Institute for Fiscal Studies, the return of national debt to sustainable levels will no
t be reached until 2032 – some 23 years away. It reckons that the Government will have to find an extra £45bn a year in tax rises and spending cuts by 2017-18 on top of the measures announced in the Budget.
The second is that it will come to mark the passing of an era – the beginning of a switch between one epoch and another. Long after the figures in this latest Budget are forgotten, or abandoned or swept away by history, it will be seen as a defining moment. Prior to this Budget there was a 10– year run of ever-rising public spending and concessions to pressure groups. After it, the case for the Government shifting to a new era of restraint and spending control looks unarguable.
For Labour's political fortunes, the future looks grim. It is impossible for the Government to sustain a borrowing profile of this magnitude – £703bn over the next three years – and still carry on with buying off lobby groups and allowing public sector largesse. But this, for now, is what Darling intends to do. The figures show he still nurtures an ambition to maintain public spending, with growth in real terms of 0.7% over the next four years. Few seriously believe this can be maintained.
Much has been made of the announced £15bn of "efficiency savings" and the introduction of a new top rate of tax at 50% for those earning £150,000-plus. The first, representing just 2.6% of total spending, barely signifies. And the second may bring at best £7bn of extra revenue – tiny in relation to a budget deficit of £175bn and likely to be much smaller as the intended victims rearrange their affairs or decide to quit Britain altogether. After the collapse in confidence over bankers and their bonuses, public attitudes to a new top rate of tax are ambivalent where not actually positive. But as a serious answer to the problem it is of little consequence.
The Budget rhetoric made much of the Government's determination to avoid the horrors of the 1930s Great Depression. This is of course the outcome with which this Government is now obsessed.
But the really worrying comparator decade for Labour is not the 1930s, it is the 1970s. It was in 1974 that a Labour Government was presented with the need to rein in spending and borrowing. It ducked those two tasks. That delay was fateful. Thus, inevitably, came the denouement of 1976 and Denis Healey's Budget for the IMF. By then it was too late. The suddenness of the cuts and the need to rein in public sector pay brought a bitter harvest. After 1976 came a wave of public sector strikes and the fall of the Government. The Budget of 2009 will be seen as a history-repeated moment of truth, and one from which the Chancellor recoiled.
And the problems are ominously similar to those which bedeviled Labour in the mid 1970s. Few believe that a Labour Government will seriously squeeze public spending in coming years unless they face huge financial market pressure. And the latest Budget showed little evidence of a Government committed to bringing about a smaller state.
The gap between 'Two Nations' Britain – comprising the Government sector, which remains relatively sheltered from this recession, and the private sector, having to brave this storm full in the face – is set to widen.
So if it has done all too little to bring debt and borrowing under control, what has it done to cauterise the recession? The package of micro measures for business may have made little impact in the bigger story of those borrowing numbers but they are significant in aggregate and amount to help for business totalling £3.3bn. In areas such as help for export credits and loss-relief clawback, Alistair Darling ticked off most of the items in the business lobby wish list. But does it give business a fighting chance? And will it lift confidence?
The biggest problems facing business are credit availability and its price. There are huge problems with toxic debt. And I increasingly hear stories of rapacious credit pricing by banks: hefty arrangement fees, real effective rates of interest that are well above the apparent rates of Libor by two or three percentage points. Business fears that the toxic assets relief programme under which problem loans are guaranteed by the Government may be working to encourage banks to push companies into administration.
As for confidence, it was interesting to note that at a post-Budget business breakfast organised by the Edinburgh Chamber of Commerce on Thursday morning, a show of hands vote revealed no one more confident as a result of the Budget, and only around 20% of the audience said they believed that business conditions in the capital would be much better a year from now. Darling may believe we will be out of recession by the end of the year and that Britain will be well placed to take advantage of the forecast doubling of the world's wealth over the next 20 years – a claim he made no fewer than three times in his Budget speech. However, the historical evidence is that recessions sparked by financial crises such as this one tend to be deeper and last longer than 'normal' recessions. This looks to be no exception.
However, one encouraging sign is that the appalling run of GDP numbers over the past six months is now beginning to moderate.
The worst may now be behind us. But whether GDP stabilises in the second half of this year as claimed in the Budget is now a closer call and there has to be a greater risk that output continues to contract over the rest of the year.
Preliminary figures for gross domestic product showed a plunge of 1.9% in the first quarter, compared with the 1.6% decline recorded in the final three months of last year. It is the sharpest quarterly decline since the third quarter of 1979. The ONS numbers point to a 5.5% drop in industrial output over the quarter. Manufacturing was down by 6.25%.
Scotland is faring no better. Figures for the fourth quarter, released last week, showed the economy falling formally into recession, with GDP slumping by 1.7% in the fourth quarter. Growth over the year was pared back to 0.5%. Both figures were marginally worse than those for the UK as a whole (a decline of 1.6% in the fourth quarter and growth of 0.7% over the year). So much for the thesis that having a bigger public sector would cushion us from the worst.
Scotland's figures show an alarming slump in the production and construction sectors – both tumbled by 4.7% in the final three months of the year.
The service sector looks to have held up relatively well, with a fall of just 0.8% in the quarter. However, in the quarter that saw a slump in bank lending, the collapse of HBOS and Royal Bank of Scotland brought to its knees, Scotland's financial services sector is officially claimed to have grown by 2.2%. Strange are the ways of Scottish Government statistics.
The biggest immediate problem, and the one the Chancellor could and should have done more about, is the budget deficit. Here the post-Budget verdict has been damning, and worrying.
The trouble is not just that the deficit projections presented – £175bn in 2009-10, £173bn in 2010-11, £140bn in 2011-12 and £118bn in 2012-13 – are staggeringly high in themselves. It is that the UK has a history of repeated fiscal slippage. The Government has revised up forecasts for UK fiscal deficits and public debt in each of the last seven Budgets.
The scale of the upward revision this time around has been colossal. The total amount of borrowing over the next four years is raised by £486bn. And the forecast for public debt in 2012-13 is revised up from £731bn in the Budget last year to £1.2trn now.
Even this new forecast may prove optimistic. Economists at Citigroup now expect the deficit to overshoot the Treasury forecasts, climbing to £189bn (13.5% of GDP) in 2009-10 and £203bn (14.1% of GDP in 2010-11 – new record highs.
This was no Budget of solutions, only one of deeper problems.
The full article contains 1492 words and appears in Scotland On Sunday newspaper.
