Government credit at its limit?

The government has limited scope to implement its planned stimulus package as borrowing soars, according to a key economic think-tank. The Ernst & Young Item club forecasts that net borrowing will rise to £180bn in the forthcoming tax year and will exceed the Chancellor's own prediction. It said that public finances were deteriorating "at an alarming rate". Last week the IMF said that the UK would have to borrow 11% of national income to battle the financial crisis - the highest of the G7 nations. That figure was overly optimistic, according to the Item club. It forecasts borrowing to stand at 12.6% of GDP next year and that the UK would be running deficits over the next decade.

Link to BBC News

Government borrowing highest since 1946

The public finances lurched to a record deficit last month driven by a weakening economy and overspending by the government, and analysts say much worse is yet to come as the economy tips into recession.The Office for National Statistics said that public sector net borrowing came in higher than expected at £8.1bn, a record for a September and way above the £4.8bn shortfall seen in September last year. That left the cumulative PSNB for the first half of the 2008/09 fiscal year at £37.6bn versus £21.5bn in the same period a year ago and the highest since records began in 1946. An interesting graphic showed Debt as a % of GDP and despite the current figures the UK remains near the bottom of the table with a figure of 43.6%. For the US it is 60.8%, France 63.9%, Germany, 64.9%, Italy 104% and Japan 170%. If the support for Northern Rock is removed the figure for the UK stands at 38%. There is a view that the the National Debt will reach 100% of GDP by 2010/11 and whilst it is acceptable to borrow during a recession, these higher borrowing figures have emerged before the recession has really started. Link

There is an explanation of the significance of higher government borrowing. (Link)

News of recession dominates

Numerous articles in The Observer today about UK economic prospects ... namely that the recession is upon us. The Ernst and Young Item Club will warn this week that we are in the grip of a severe economic slowdown at the same time as GDP figures are widely expected to confirm that a recession is already underway. Item expects GDP to decline outright next year by 1% - the first full year of decline since 1991. It predicts a gradual recovery in 2010, with the economy recording growth of just 1%. Consumer spending would be hard hit over the next two years, as households try to rebuild their finances in the face of sickly income growth and plunging property prices. Link to Ernst and Young There isa good report of the forecast on the BBC News site. Link

There is an interesting view of the likely impact of the recession and the suggestion that it will be nothing like the one that gripped Britain in the early Eighties. It will hit people in different industries - finance and leisure, not manufacturing. And London, not the North, will bear the brunt. Link: It's grim down South

Will Hutton highlights that aspect of a recession that has the most impact on individuals - unemployment. 'Over the good years unemployment came to be characterised as a matter of choice; there was work out there if you wanted it or could be bothered to get out of bed. It has been a controversial argument; worklessness has always been part of a vicious circle of self-reinforcing lack of self-worth and poverty of opportunity, tending to be clustered in areas of deprivation. It is rarely if ever a matter of choice. People want to work. Human beings want to realise our potential and dreams. Work provides sustenance, meaning and structure to our lives. It is where we meet the bulk of our friends and partners. In a recession the argument that the unemployed are unemployed by choice will not wash. To stand idly by is to condemn our fellow citizens to poverty, futility and meaninglessness.' It is the young (school and college leavers, new recruits) who have yet to show their usefulness and to acquire new skills who are affected first. He goes on to outline measures which should be taken to inject spending power into the economy, the quickest and most effective, ironically, by putting cash into the hands of the unemployed. Raising unemployment benefits and increasing cash payments should be a priority - it is not just that need the cash but that they spend it the fastest. The next most effective measure is to increase spending on the national infrastructure. Link to article

See Geoff Riley's excellent blog (Could the UK budget deficit reach £100bn?) for an overview of current government borrowing and the National Debt.

Larry Elliott in The Guardian

In his article 'Farewell prudence, hello £2.7bn slush fund', Larry Elliot reflects on Labour's efforts to deal with the criticism of the abolotion of the 10p tax band and the political uproar it has caused. It is a solution that is too late...' The trouble is that it has taken 14 months to find this solution and it came only after the government first insisted there was no problem and then said the poor state of public finances meant only a far less generous package was affordable.' Does it stand as a credible economic policy?

The £2.7bn can now be seen as a 'political' move designed to influence the Crewe and Natwich byelection. He compares it to the last time tax giveways were used to try try to gain electoral advantage, Norman Lamont in 1992. He suggests the government's reasons for the change, quoting Alistair Darling "As I made clear at the time of the budget, it is right and sensible to allow borrowing to rise and investment to be maintained as the economy slows. Debt is lower than in the past and low by international standards. Our fiscal policy, like our monetary policy, is designed to support stability in these uncertain economic times generated by the turbulence in world financial markets and global commodity price inflation."

Elliot thinks this is unconvincing, outlining the the two views on fiscal policy: 'One is Keynesian: the idea that when times are tough, governments should do more than simply allow borrowing to rise as a result of falling tax revenues and rising welfare payments; instead they should raise spending or cut taxes to boost activity. The other is called Ricardian equivalence: attempts by governments to borrow their way out of trouble are doomed to failure because individuals know that there is no such thing as a free lunch, with today's tax cut turning into tomorrow's tax increase. As a result, they don't spend the windfall from the state, but save it for the day when they have to pay it back.' The recent $150bn worth of tax rebates in the USA was designed to reinforce the effects of lower interest rates whereas the £120 per taxpayer will have significantly less effect. Read the full article here.