Magazine article Management Today

Time to Be Tough and for a Touch of That IMF Muscle

Magazine article Management Today

Time to Be Tough and for a Touch of That IMF Muscle

Article excerpt

It may be that we need an outside agency to stiffen our resolve, writes David Smith

Think of a big number. Double it, treble it and multiply it by itself. Even then, it is unlikely that you will come anywhere near 50 billion [pounds], the Treasury's estimate for the public sector borrowing requirement (PSBR) for this year. Fifty billion pounds, five with 10 noughts after it, is an enormous number - no less than 8% of gross domestic product (GDP). The task of dealing with it is enough to dampen even the ebullience of Kenneth Clarke, the Chancellor of the Exchequer.

The chart (below) puts the problem of Britain's budget deficit into perspective. It shows the general government financial deficit (which excludes privatisation proceeds and some other transactions) as well as the |primary' budget deficit, that is, the deficit excluding debt interest. The general government financial deficit for this year, at more than 10% of GDP, is almost twice as large as that which forced the 1974,79 Labour government to call in the International Monetary Fund (IMF). The primary deficit, as Chief Secretary to the Treasury Michael Portillo, was brave enough to admit recently, is easily worse than in any other EC country - yes, even Italy.

The painless solution to the PSBR problem is economic growth, and plenty of it. The argument here is straight-forward enough. Growth boosts tax revenues and eats into cyclical elements of public spending, notably those on unemployment-related social security spending. If we could be sure that the economy was set for growth of 4% a year for the next four years, then Clarke could sit back and watch his budget deficit problem disappear. Relying on a four-year boom, particularly one that would begin its life during a deep European recession, is, however, rather like betting the nation's finances on picking an outsider to win the Grand National four years in succession. It could happen but it would be unwise to rely on it.

The Treasury, in its medium-term projections, assumes average growth of 2.75% a year from now until 1997-8. On this basis, and after the deferred increases in VAT on fuel and power and National Insurance contributions announced by the former chancellor, Norman Lamont, in the March Budget, this year's 50 billion [pounds] is the peak for the PSBR. But even at the end of the period, it would still be a hefty 30 [pounds] billion. If growth is a stronger 3.25% a year, the PSBR comes down to 18 billion [pounds] by 1997-8. If it is a weaker 2.25% annually, the borrowing requirement hardly comes down at all, and would still be 42 billion [pounds] at the end of 1998.

It could be that these projections are much too cautious, and that growth will bring down the PSBR much more rapidly than the Treasury thinks. After all, government borrowing proved highly sensitive to the recession. Before the economy began to contract in 1990, many of our leading forecasters were projecting a repayment of public sector debt - budget surpluses - into the indefinite future.

The sheer size of the deficit now stacks up problems for the future. The debt interest paid by the Government in the 1991-2 financial year was just over 16 billion [pounds]. This year it will be 19.5 billion [pounds], next year 23. …

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