Observations

Two parliaments of pain

Date: 23 April 2009
Authors:
Publisher: IFS

Alistair Darling admitted yesterday that the underlying health of the public finances is much weaker than he thought in last year's Pre-Budget Report, and that it will take two full parliaments of intensifying austerity to get government borrowing back to acceptable levels.

 

The Chancellor's forecast that the Government would need to borrow £175 billion this year - almost 12½ per cent of national income - had been well trailed in advance. Much more surprising was the Treasury's assessment that four-fifths of this borrowing will be 'structural' and therefore impervious to economic recovery - whenever it comes and however strong it is.

 

The Treasury has revised up its estimate of the structural budget deficit for 2010-11 from 7.2 per cent of national income in the PBR to 9.8 per cent in the Budget, increasing the size of the hole that the Treasury thinks needs to be filled by around £35 billion since the PBR.

This reflects a number of factors. For example, the Treasury thinks that the economic crisis will punch a bigger hole in the productive potential of the economy. It also expects the level of prices in the economy to be lower over the long-term. It has also been hit by the growth of 'VAT debts'.

 

In response, the Chancellor announced cuts in capital spending plans, cuts in other government spending plans and increase in taxes that will each raise about £9 billion each by 2013-14, adding up to 1.6 per cent of national income. But this will still leave the government borrowing 3.2 per cent of national income more than it needs to invest in that year.

 

That means that whoever takes office in the general election after next will still have to find another £45 billion a year in today's money by the end of their parliament to eliminate this deficit, from tax increases and cuts in non-investment spending.