Magazine article Public Finance

It's Not as Bad as You Think

Magazine article Public Finance

It's Not as Bad as You Think

Article excerpt

'Constructively pessimistic' is probably the fairest way of describing this week's Budget. Chancellor Alistair Darling was attempting to cover the bitter pill of economic reality with a light sugar coating of future growth.

However bad things will be during the next year, it will not always be like this. By projecting 125% growth for 2010, Darling was hinting at better days ahead. Nevertheless, the next decade looks grim for public spending.

Unless some new horror hits the banking system, the medium-term outlook for Britain can now be approached with reasonable certainty. The government has made a decision to tax the future, by use of borrowing, so that the impact of the recession can be lessened. The Budget revealed public sector borrowing of E175bn in 2009/10, much the same next year and then a gradual path downwards. Government debt will climb to an amount equivalent to 79% of gross domestic product in the years ahead.

Darling signalled tax increases and public expenditure constraint as the twin mechanisms to bring down public sector borrowing. He will pursue a policy that Conservative leader David Cameron once described as 'sharing the proceeds of growth'.

The chancellor is assuming the economy will revert to growth of 2.5% per year - or, surprisingly, higher - from 2011/12 onwards. Real-terms current public spending will rise by 0.7% a year, while capital spending will fall in real terms. Overall, cash increases in spending will be around 3% a year. Even the NHS and schools will face a sharp slowdown in their annual spending increases. Other services face zero growth or real cuts.

The Budget attempted to describe a path for the government to reduce the impact of the recession and then bring borrowing back to reasonable levels. By the time these objectives have been achieved - which would require continuous and strong economic growth - overall government debt would have risen to nearly 80% of GDR or almost certainly higher.

If Labour or an incoming Conservative government then attempted to reduce public debt levels back towards the 35%-40% level previously seen as a target, there would need to be a similar pattern of very small real-terms public spending increases until, perhaps, the 2030s.

It is unlikely any government would feel comfortable squeezing public expenditure levels for such a long period. What is more likely to happen is that, once public borrowing has been brought down to manageable levels, a consensus will emerge that Britain can live with a national debt figure equivalent to 80% of GDP.

Although far higher than the levels achieved by either the Conservatives' Kenneth Clarke or Gordon Brown when chancellor, this figure is still not as high as debt in a number of other countries. …

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