The folly of hoping for the fiscal best
Published: April 19 2009 19:28 | Last updated: April 19 2009 19:28
Never before in peacetime has a chancellor of the exchequer watched so deep a fiscal hole open so swiftly before him: annual net UK public borrowing is expected to reach £175bn, or 12 per cent of national income, over the next two years. As he announces his forecasts in his Budget on Wednesday, Alistair Darling will display customary sang-froid. Is that all he must do? The answer is: absolutely not.
This week’s forecasts will be far above the 8 per cent of gross domestic product borrowing in 2009-10 and 6.8 per cent in 2010-11 forecast in theNovember 2008 pre-Budget report. The Treasury was then suggesting that the economy would shrink by a mere ¾–1¼ per cent in 2009, followed by growth of 1½–2 per cent in 2010. Now, the average of independent forecasts is for a decline in GDP of 3.4 per cent this year, followed by growth of 0.3 per cent in 2010.
Darling to admit £60bn bail-out bill
By Chris Giles, Economics Editor
Published: April 19 2009 23:37 | Last updated: April 20 2009 00:09
Alistair Darling has decided to concede for the first time that the government will not recoup the full costs of its banking interventions and that the bill could be as high as £60bn.
Following the example of the US, the chancellor will make a provision in the Budget for taxpayer losses from the banking sector, which will be added to last year’s public borrowing totals and public sector debt.
The provision for banking losses will come in a Budget likely to be dominated by forecasts of huge public borrowing, with the Treasury expected to project a peak deficit of £170bn-£180bn.
It will rein in that borrowing – at 12 per cent of national income, the highest in peacetime – predominantly with a combination of deferred cuts to public expenditure plans and by extending the horizon of its projections.
This wait-and-see approach, Mr Darling is likely to argue, will give a future government more time to restore prudence to the public finances without killing any economic recovery. The Treasury believes that economic uncertainty is so great at the moment that it makes no sense to set a detailed strategy for deficit reduction when any such plans might need to be ripped up in a month’s time.
At the end of March, Mr Darling told parliament that he hoped shortly to be able to reveal the exchequer cost of the UK’s bank recapitalisation programme and numerous state guarantees of banks’ and depositors’ funds.
On Sunday, a Treasury spokesman confirmed that such a provision would be included in the Budget and Mr Darling would estimate a loss for the first time.
The Treasury currently expects losses to be substantially smaller than the International Monetary Fund’s recent estimate of £135bn, or 9.1 per cent of national income. The IMF’s figures include costs attributed to Bank of England programmes, such as the special liquidity scheme, which attracts a hefty fee from banks and has many safeguards against loss.
Last night, the Treasury would not confirm the exact size of the provision but indicated that it was likely to be below – but relatively close to – £60bn, or 4 per cent, of national income.
Since the Treasury has already raised the money needed to fund the bank recapitalisation programme, the provision will have no immediate impact on gilt issuance. But the government bond market is likely to be surprised by the level of gilt sales needed in the coming year from regular government borrowing.
With a deficit of more than £170bn, the Treasury is certain to revise sharply upwards the projected £147.9bn gilt issuance that the Debt Management Office published a month ago.
Copyright The Financial Times Limited 2009
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