Update on the budget, from John Birchall
The news from the Office for National Statistics that the public sector net borrowing reached £16bn in May, down from £17.4bn at the same time in 2009 could mean that the worst is now over for the UK's public finances. However, The Treasury will have already decided on the major parts of the Chancellor’s Budget to be given on 22nd June.
The worst recession in 60 years has seen Britain's budget deficit move to net debt standing at around 62% of GDP - it’s highest since records began.
The deficit is still expected to reach 11% of GDP in the current fiscal year, which confirms the belief that it will take a number of years for borrowing to be reduced.
You may like to look back at the Economics Blog of 14th May (http://www.philipallanupdates.co.uk/Speakers-corner/Economics/May-2010-%281%29/Just-how-will-this-debt-be-cut-.aspx) for an analysis of how certain proposals would reduce the deficit.
Source: Office of National Statistics
In 2009 the UK recorded a general government deficit of £159.2 billion, which was equivalent to 11.4 per cent of gross domestic product (GDP).
At the end of December 2009 general government debt was £950.4 billion, equivalent to 68.1 per cent of GDP.
The Maastricht Treaty's Excessive Deficit Procedure sets deficit and debt targets of 3 per cent and 60 per cent respectively for all EU countries.
How does the UK compare with other EU countries?
So, cuts in public sector spending are inevitable. But where, when and by how much – that will be announced tomorrow, Tuesday 22nd June.
What might be in store?
In the modern world of politics much depends on’ spin doctors’ and the managing of the electorate’s expectations. Looking at Saturday’s newspapers it appears that the public sector and it is not clear if this will be both spending in the sector and the salaries earned by those working in it but both are likely to discover some unpleasant news on Tuesday afternoon. We might all be in for a surprise for if you are going to hit the people in their pockets it is best to do it early in the life of your government, so an increase in VAT may be announced. If it is then 20% seems likely. Though not generating large sums of money it will move UK VAT rates towards the EU average.
What of a total freeze on ‘benefits’ a generic term that covers rather a large number of payments - the figure put on the potential saving by the Treasury is £4.4 billion. The Institute for Fiscal Studies puts it at £4.1billion for a one-year freeze, rising to £24.6 billion if it were extended for the whole parliament. An increase Capital Gains Tax will have been ‘watered down’ by a lobby from pre Tory supporters including The Daily Telegraph. It is worth remembering that Messrs Cameron and Osborne sprang to prominence promising to remove the majority of people from this tax.
Several billions have already been taken out of future projects and one suspects Corporation Tax will be reduced – though possibly by a smaller amount than first mooted and over a longer period of time.
Nick Clegg, the Deputy Prime Minister, disclosed that radical changes would be made to the system of child tax credits, which will be taken away from middle-class families, and limited to those on the lowest incomes.
The benefit, which can currently be claimed by parents with a combined income of £58,000, or £66,000 if their child is under the age of one, will be restricted to those on less than £30,000, or even £25,000.
Nine out of 10 families with children under the age of 16 are currently eligible for child tax credits. By restricting the benefit to those earning less than £30,000, more than two million would lose out.
That’s just a start and there will be more to come. The government faces either cutting spending or increasing taxes – both are politically sensitive, hence Mr. Cameron’s and the gentler Liberal leader Mr. Clegg’s have been preparing us all for hard times ahead.
It will be interesting to read the detail of the Budget Speech. How will it affect:
• The regions where neither party now in power has the same political risk as they would face in the South East and the Midlands.
• The lower end of the ‘middle classes’ many of whom did not vote for large cuts now but favoured Labour’s and the Liberal Democrat’s ‘gradual’ approach
• The view of the dreaded markets, which once assumes are normally more Tory sensitive react to both the tax increases and the spending cuts
• The way in which the electorate see coalition governments – a referendum on PR is expected next year, so if the voters say yes to PR it’s coalitions for the UK for the foreseeable future
I’ll post a new blog on Wednesday 23rd when the ‘devil in the detail’ will have been analysed in great detail. Meanwhile enjoy Tuesday.
An Alternative Point of View
Paul Krugman puts forward a somewhat different solution to the deficit crisis. It is, in theory, related to the US economy but No 11 Downing Street might find it interesting!
http://www.nytimes.com/2010/06/18/opinion/18krugman.html?src=me&ref=homepage