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Just sketch out the route ahead, Mr Darling, that will be scary enough

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    Just sketch out the route ahead, Mr Darling, that will be scary enough

    http://www.telegraph.co.uk/finance/c...ry-enough.html

    Just sketch out the route ahead, Mr Darling, that will be scary enough
    It is only five months since poor Alistair Darling had to stand at the despatch box and announce those dreadful borrowing figures in his Pre-Budget Report (PBR). He must now announce numbers which would surely have been beyond his imagination then – and still we won't be sure that this is the worst of it.

    Beneath the dour Scottish calmness of the Chancellor, the Treasury is in a flat panic about the fiscal position. If the next five months see a deterioration equal to that which has happened since the PBR then we will be staring at a catastrophe.

    The Chancellor will have no choice but to concede that the economic outlook has deteriorated sharply. In the PBR, he forecast real GDP to fall by about 1pc this year. To most observers at the time that seemed dire enough. But the least he can get away with now is admitting that the economy will contract by between 3pc and 3.5pc. I think the fall will be more like 4pc.Meanwhile, he optimistically expected the economy to grow by between 1.5pc and 2pc next year.

    Admittedly, in its February Inflation Report, the Bank of England forecast growth of around 1.2pc. But the truth of the matter, as you will surely have grasped, is that no one has a clue. For what it is worth, the consensus forecast is for growth of only 0.3pc, while I am pencilling in another contraction of 1pc. Even if the Chancellor stays on the optimistic side of the fence, he will probably still have to nudge down his growth forecast to only 1pc to 1.5pc.

    According to the Treasury, every 1pc fall in nominal GDP increases annual borrowing by around £10bn. Using this rule of thumb, by next year the deterioration in the economic outlook since the PBR is likely to raise borrowing by around £40bn per annum.

    However, public borrowing has deteriorated more sharply than the weakness of GDP on its own would indicate. This suggests some sort of structural deterioration. One feature of the recession has been the slump in housing market activity, which has dented tax revenues such as stamp duty. Meanwhile, the financial crisis has severely hit bonuses in the City, on which higher rate income tax is generally paid, and also sharply reduced receipts of corporation tax. This structural deterioration could easily add another £40bn per annum to borrowing.

    I suspect that annual borrowing will increase to £200bn this year, rising to £230bn next year. This would be some 16pc of GDP, far and away the largest peacetime deficit in our history, and one of the largest anywhere at any time.

    The Chancellor won't announce such a large figure, in part because of his greater optimism about the economy. But I still think that he will announce borrowing of around £175bn this year – a far cry from the PBR forecast of £118bn.

    The effect of all this extra borrowing will be to push Mr Darling's projection for the level of public sector net debt up to over 70pc of GDP by the end of 2012/13, compared to the 57pc forecast in the PBR. In reality, I suspect, that the out-turn will be more like 100pc – and rising. Remember that the supposedly magic number that the blessed Gordon insisted that public debt would stay below was 40pc. And, by the way, these gargantuan numbers still exclude a host of potential banking liabilities, PFI liabilities and unfunded public sector pensions.

    Given all this, the idea that the Chancellor will be standing there and announcing the odd few quid on or off this or that seems utterly bizarre. But he will.

    What might he do? I am sure that there will be a flurry of measures. I am equally sure that they will not add up to a ha'penny chew. There may well be the occasional Treasury trick, such as bringing forward some already planned public sector capital spending. The advantage of this is that it doesn't raise the long-term path of borrowing.

    Some tax changes are also likely. He could extend the temporary reduction in VAT to 15pc for another year, costing about £12bn. But this could be counter-productive, since it would postpone any surge in spending that would happen ahead of the reversion to the higher tax rate.

    He may well target groups of people who are suffering most for a bit of Treasury largesse, or should I say minimesse. The truth of the matter is that what he does will be all about gestures and political posturing.

    Press attention has focused on the savers and pensioners who are suffering from low savings rates. The Tories have proposed abolishing the basic rate of income tax on saving, costing just £300m. This seems both fair and long overdue, but will the Government really want to encourage people to save at the moment? He could also give more help for the unemployed. One suggestion is that the Government would pay a wage subsidy for employees moved to shorter hours.

    Looking beyond this year, the world and his wife expects taxes to rise, and he could start the process now. He will be loath to implement tax rises in the teeth of the recession – but he may be forced to announce them now, for implementation later. One possibility is not only to reverse the temporary VAT cut, but then to increase VAT above its previous rate. Increasing it to 20pc would raise about £12bn per annum. Or he could focus his attention on higher rate taxpayers again.

    In a budget when there is so little that can plausibly be done, there is much that can and should plausibly be said. The real contribution that Darling could make to this country's recovery is to sketch out for all of us how we can get out of this mess. And we can. Believe it or not, we have been in worse messes before. But the word is sketch. Forget long-term forecasts. We have come to such a pretty pass that in current circumstances, such forecasts emanating from the UK Treasury would be about as convincing as a schedule of Lenin's plans for the socialist millennium.

    The trouble is that a realistic sketch would involve either such stringency on Government spending or such hair-shirt policies on taxes, or both, that his boss next door surely would not stomach it.

    Instead, as the Chancellor stands up on Wednesday, we are likely to get another episode of the usual Westminster pantomime. "Behind you!" we should all shout. The figure who will be behind him then has been behind it all.

    ==================================

    If Roger is right is means total GDP drop will be around -2.2% -4% -1% =-7.2% so depression will be avoided.

    #2
    Originally posted by BrilloPad View Post
    If Roger is right is means total GDP drop will be around -2.2% -4% -1% =-7.2% so depression will be avoided.
    Roger?

    Is that Roger Bootle?

    The Roger Bootle from Capital Economics?

    The Roger Bootle from Capital Economics that has for years been predicting a major dowturn in the housing market that hasn't happened until now?

    If you repeat the same thing over and over again I suppose you will be correct once in a blue moon. A stopped clock still tells the correct time twice a day blah, blah, blah.

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      #3
      Originally posted by Gonzo View Post
      Roger?

      Is that Roger Bootle?

      The Roger Bootle from Capital Economics?

      The Roger Bootle from Capital Economics that has for years been predicting a major dowturn in the housing market that hasn't happened until now?

      If you repeat the same thing over and over again I suppose you will be correct once in a blue moon. A stopped clock still tells the correct time twice a day blah, blah, blah.

      To be fair, I do remember listening to him on money box a couple of years ago, he refused to make any predictions on house prices saying that he had gotten it so badly wrong previously.




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      ("")("") Born to Drink. Forced to Work

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        #4
        But to be more serious, it will be interesting to see how the numbers play out.

        I predict we will find that tax revenues collapse worse than expected this year and how on earth is the country going to pay for itself?

        Comment


          #5
          Originally posted by Gonzo View Post
          Roger?

          Is that Roger Bootle?

          The Roger Bootle from Capital Economics? ..
          Sounded more like Roger Evans-Pritchard, but then his first name isn't Roger
          Work in the public sector? Read the IR35 FAQ here

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