New statistics on the public finances out today from the ONS contain another revision down of borrowing in 2009-10. They put public sector net debt at £890 billion at the end of March. Or £771.6 billion for the "excluding financial interventions" figure, down from the £776.6 billion given in Budget 2010 that we used for the Debt Clock. That is good news, but as the FT reports public borrowing is still the worst it has been since the War. And despite the politicians spending weeks arguing over £6 billion, the scale of the issue is such that a revision of the debt down by £5 billion is overshadowed by much bigger storm clouds on the horizon.
The first is that the Government are still relying on plausible but decidedly optimistic growth forecasts. Table B8 in the Budget reports that the Treasury are basing their forecasts for the public finances on growth of 3 to 3.5 per cent in 2011. By contrast, the average of independent forecasts puts growth in 2011 at 2.1 per cent.
The new World Economic Outlook released by the IMF yesterday cuts their projection for UK growth in 2011 to 2.5 per cent. Ed Conway has an article in the Telegraph about how high levels of public and private sector debt are undermining the recovery. If the IMF are right, and the Treasury is wrong, the resulting lower tax revenues and higher spending will quickly outweigh the slight revisions to the net debt being made at the moment.
As public spending has increased to the kind of levels seen in continental European countries, so we are seeing similar lacklustre growth. The oversized public sector is set to squeeze out private sector growth. Compared to the eurozone, we have higher inflation and a weaker recovery in manufacturing, but our more flexible labour market is delivering lower unemployment. We will grow less than the United States in 2009, 2010 and 2011 even though they have their fair share of problems. And economic modelling like this may underestimate the problem in the medium term as economic models struggle to capture the well established effect of high spending on trend growth, and Britain has seen a massive increase in spending compared to most other developed countries. The TPA will be releasing new research on this issue soon.
IMF World Economic Outlook growth projections
Another risk to the public finances is that interest rates might not stay broadly where they are now as the Treasury expects. Mike Denham discusses how that could mean a huge additional bill that taxpayers will have to pay in this video from our post-Budget briefing. The bill for government debt interest is already set to be more than the amount currently spent on mortgage interest. In it, he talks about a range of potential gilt rates, with the highest he considers 7 per cent. As he says, that would be extremely high compared to the experience in recent years but given the scale of the crisis in the public finances it is far from impossible. Just to reinforce that, the Financial Times reports today that the interest rate on 10-year Greek government debt has hit more than 8 per cent.
Britain isn't in the kind of position Greece is yet, but that is because the markets trust that serious action will be taken on the deficit after the election - by contrast they don't even trust the Greeks to tell the truth about how much they are borrowing. That trust can evaporate awfully quickly though, if it doesn't look like cuts in spending and borrowing are coming. A responsible government needs to cut spending and start restoring the public finances to health quickly once the election campaign is finished.