Ruth Lea is a leading economic commentator and Economic Adviser to Arbuthnot Banking Group.
Chancellor Darling spoke with piety in today’s “do little” budget. Government policies had averted disaster and – reflecting the interventionist activism – borrowing was actually expected to be lower than at the time of the Pre-Budget Report. Instead of a borrowing requirement of £178 billion (12.6 percent of GDP) for 2009-10, it was now expected to be £167 billion (11.8 percent of GDP). Moreover, the equivalent figures for subsequent years were better than just three and a half months ago. What could be a better testament to the prudential management of the economy and the nation’s finances?
Well, do not be deceived. The borrowing figures are still absolutely dreadful. The cumulative borrowing from 2009-10 to 2013-14 will be a hefty £660 billion and net debt will touch nearly 75 percent of GDP by 2013-14 compared with less than 45 percent in 2008-09.
Now, we all understand that much of the recent deterioration in the public finances is a result of the quite unprecedented recession. But let us remind ourselves that we entered the downturn with a structural deficit when, given the previous growth, the Government should have been running surpluses. But we are where we are and now the question is: Where do we go from here?
Chancellor Darling tells us that any fiscal consolidation that is more rapid than his current trajectory suggests would be foolish and risk recovery. But he fails to tell us that, by running such large deficits, the Government will still have to sell gilts to the market which will require higher, more attractive rates of return than would otherwise be the case. In other words, his refusal to entertain quicker fiscal tightening inevitably means higher interest rates that will damage recovery. His economic analysis is, therefore, decidedly economical with the truth.
This budget was mainly an exercise in political posturing. We will all have to wait for the next Government, whatever its political hue, to provide clearer indications of where the public finances will go.