TELEGRAPH 27.5.09
1. Treasury survey embarrasses Chancellor over economic forecast
Alistair Darling faced fresh embarrassment when the Treasury's own
survey of economic forecasts contradicted the Chancellor's, and
raised the possibility of a £70 billion black hole in the public
finances.
By Andrew Porter, Political Editor
the gap, according to the Conseravtives who said Labour's forecasts
were based on "fantasy."
Mr Darling's own forecast for growth to rebound strongly after this
year were also thrown into grave doubt by the survey of 20
independent forecasts included in the Treasury survey.
The survey predicts over the next four years the total borrowing
figures will be £679 billion. In the Budget Mr Darling said it would
be £606 billion. That would mean the Treasury would need to find
another £72.7 billion in borrowing.
Last month's Budget forecast that growth would be 1.25 per cent in
2010 before bouncing back to 3.5 per cent in 2011, 2012 and 2013.
But the average forecast found that in 2010 it would only be 1.25 per
cent, and then 1.9 per cent in 2011, 2.4 per cent on 2012 and 2.6 per
cent in 2013.
George Osborne, the shadow chancellor, said: "The Treasury's own
document shows that Labour are gambling Britain's economic
credibility on fantasy forecasts for the recovery.
"While we all hope that this long recession will end later this year,
Gordon Brown's claims that we will bounce back to boom time levels of
growth has now been discredited by first the Bank of England and now
the Government's own survey of independent forecasters."
"If the independent forecasters are right then the Government will
have to borrow almost £73 billion more over the next four years than
it forecast just a month ago. That's more than £2,000 in extra
borrowing for every taxpayer in the country."
Earlier this month the powerful Treasury select committee issued a
withering verdict on Mr Darling's Budget projection. The Labour-
dominated committee said that it was "an optimistic assumption" to
believe the Treasury's growth forecasts could be met amid continuing
economic uncertainty.
On Tuesday night a Treasury spokesman said: "We stand by our the
forecast we made in the Budget. It is going to be a difficult year
but we expect growth to return."
Mr Darling has repeatedly been accused of offering too rosy a view of
the economic prospects. He has been forced to change forecasts as the
recession took hold. [Growth might return but at the very same
moment will come the obligation to repay all our vast debts. He
seems to have forgotten that -cs]
==============AND ---------->
2. Tumbling towards a sovereign debt crisis?
Posted By: Edmund Conway
In the Sunday Telegraph, I wrote about how the S&P rating warning
over the UK's creditworthiness last week represented the shift to the
next stage of the economic/financial crisis. The point being that
whereas 2008 was a year defined by banking crises, 2009 and 10 will
be years defined by sovereign debt crises. This is quite logical -
after all, most of the toxic assets and the legacy of the massive
leverage bubble have not gone away, but have simply been transferred
to the public sector.
I genuinely don't know whether this will cause a funding crisis in
the UK - merely that it is a serious risk. Much depends on whether
the politicians from both parties come up with convincing enough
plans to put the public finances back in order, but the S&P decision
(to change the outlook on the rating from "stable" to "negative")
indicates they are not there yet.
Just in case you suspected that these sentiments were merely
gratuitous apocalypticism, it is worth pointing out a note from JP
Morgan Asset Management this morning, entitled: "Sovereign debt the
next crisis".
According to their analyst David Shairp, his fears of a debt crisis
in the OECD "began to crystallise" with the S&P announcement. [See my
"The wolf's at the door" on 22/5/07 at 1047 am -cs] He adds: "To be
fair this has been coming for a while. The UK April budget announced
budget deficits of 12pc of GDP this year, another 12pc in 2010/11,
with only a gradual fall to 5.5pc by 2013/14. It is worth noting that
these prospective deficits are larger than the actual deficits Turkey
ran prior to going to the IMF in 2001. The UK's debt dynamics look
tricky: the potential combination of lower trend growth (due to the
banking crisis) and an increasing risk premium on UK debt would be
disastrous for fiscal sustainability and would require an even more
savage retrenchment to bring the fiscal dynamics back under control."
(In other words, if markets demand a higher interest rate for our
debt, it doubly-squeezes the Government. Eventually, debt interest
payments alone could swell to a larger level than our budget deficit
in 2007/8. In such circumstances, you can easily find yourself
spiralling towards a full-on bail-out.)
Shairp continues: "The UK faces an unpalatable choice (as do other
fiscally challenged OECD economies). The authorities can choose to
rein in fiscal policy over the next 5-10 years, which would impose a
long period of slow growth. Or, they can effectively do nothing which
would lead to dramatic currency depreciation as foreign holders of
gilts take advantage of QE to sell their bonds to the Bank of
England. But the final denouement of the second option would probably
be an IMF austerity programme. With the UK in a political blackout
period before the general election due by mid 2010, fiscal
initiatives are likely to be on hold and there is a danger that the
bond and currency markets will take matters into their own hands."
Ouch, ouch, ouch.
However, before you panic too much it's worth bearing in mind one
other thing. The UK is not the only country likely to come under such
pressures in the coming years. Indeed, Spain and Ireland have already
been downgraded by S&P. Even the US's AAA status is under question.
So it's no longer a given that if foreign reserve managers want to
flee the UK that they will have anywhere much more compelling (and
liquid) to put their cash. The next phase of this crisis will be a
sovereign debt one, but it will be a relativistic one; any absolute
measure of how solvent or otherwise a nation is is of far less use
than a comparison with other leading economies.
Posts
