Blow-Out

MONDAY, NOVEMBER 24, 2008

Blow-Out

57% will take us to a whole other level

Well, we knew it would be bad, but we didn't know quite how bad.

Despite some £6bn pa of extra taxes from 2010-11, Darling is forecasting a hugeborrowing binge. As George immediately pointed out, in the next five years the government will borrow nearly £0.5 trillion, doubling the existing National Debt. By 2012-13, our official National Debt will be 57% of GDP, higher than at anytime since the early 70s (and it was only that high then because we were still paying for WW2).

And remember that's all on top of the massive debt he's accumulated guaranteeing the banks, and it excludes all the hundreds of billions of Enron off-balance sheet items.

But the worst of it is that, even though Darling's projected borrowing is gob-smacking, he's only been able to keep it as low as it is by making someludicrously optimistic assumptions on economic growth.

He's assuming an extraordinarily mild recession, with GDP falling by only 0.75% cumulative this year and next. That's much less than it fell in the last two recessions, and they didn't incorporate a global financial crisis. Even whackier, he's assuming growth then returns to an average 3%pa from 2010-11 onwards - which is actually higher than he assumed in his last forecasts.

It is pie in the sky.

And he's no better on public spending. Not only is he assuming another £5bn pa of those non-existent Gershon "efficiency savings" (see many previous blogs), he's also claiming he'll restrict public spending growth to 1.2% pa in real terms. Given that he'll be dealing with much higher unemployment spending, it will be fascinating to see what he plans to cut... and how he plans to locate some backbone.

We'll post again once we've had a proper look at the report. But this is a bad news budget that's actually even worse than it looks.

Bad News For Moggies

Carry me to my car Miss Jones

This afternoon Old Labour will update us on their definition of fat cat. Reportedly it's anyone on an income over £150 grand pa.

Quite coincidentally, the TPA has just published this year's Public Sector Rich List. And as you may recall, £150 grand is also the entry point for inclusion there.

This year there are 387 assorted quangocrats and public sector bureaucrats earning above the magic number (excluding Town Hall officials who have their own separate list). That's up from 300 last year. As a group, their pay has been increasing by 11% pa, and the top package is now £1.24m pa (the head of Network Rail).

But at least all these people now face the tax on fat cats.

You couldn't ask for a clearer acknowledgement of just how badly Labour has bogged up public sector pay.

Undermining The Future

So it's goodbye to New Labour. The leaked increase in our top marginal tax ratewill only raise about £1-2bn pa of revenue, but the message it sends is much more significant.

Despite a mass of evidence to the contrary (see many previous blogs), Labour hasnever believed that lower taxes lift economic growth. And they have certainly never felt comfortable with Lawson's 40% top rate for the "super-rich". As far as they're concerned, if anyone flees the country just because they have to shoulder a fairer share of tax, good riddance, because they're not people we want here anyway.

The 2011 increase to 45% will lift our combined top rate - including the employee National Insurance contribution - to 46%. Which is almost exactly in line with the current OECD average of 46.2%. But that doesn't mean we can get away with it:

• The trend among most OECD competitors is down
• Tax levels in many of the big emerging economies are much lower than in the old OECD

The big picture is that under the cover of a reflationary budget, Brown is unpicking even more of his Thatcherite supply side inheritance. It's back to good old "Keynesian" demand management, the very thing that failed so catastrophically in the 70s.

There's a very real question as whether the fiscal boost will actually work in theshort-term, given that we are all being told we'll have to pay it back in a couple of years. But in the long-term it will leave a legacy of high debt and high tax that will undermine our prosperity for years to come.

Just like Old Labour always did.

PS If you've got any spare cash at all, you should put in a bid for the final remnants of the Georgian silver and Canaletto collection Brown will be auctioning off. For obvious reasons, bidders for the new wave of asset sales will be thin on the ground, and Brown is a desperate forced seller.