This posting deals with forecasts of the likely proposals in the Pre-Budget Report (PBR) on Wednesday. Separately and later I will gather the informed comments on the gathering storm.
NOTE - The ‘missing’ Sunday Times report on the YouGov opinion poll is buried in this article - very briefly !!!
Christina
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SUNDAY TELEGRAPH 6.12.09
Pre-Budget report: UK ‘faces decades of debt’, warns Treasury
Britain faces decades of rising public sector debt, increasing taxes and, potentially, falling living standards unless it tackles the growing costs of its pensions and health bill, the Treasury will warn this week.
By Edmund Conway
In a paper to be printed alongside the pre-Budget report (PBR), the Treasury will warn that the costs of paying for state pensions and the National Health Service are set to rocket between now and 2059 unless action is taken to reduce the bill.
The paper on long-term fiscal challenges, which will accompany the shorter-term forecasts in the PBR, is intended to focus politicians from both parties on the risks faced by Britain unless they contemplate radical actions such as increasing the retirement age or cutting back on free healthcare provision.
Although the paper is likely to be over-shadowed by the PBR, in which the Chancellor is expected to accompany broadly unchanged spending plans with new taxes on the wealthy, it will sketch out a worrying picture for Britain’s fiscal future.
It will warn that, although fertility rates in Britain are significantly better than those in most of the developed world, the costs of an ageing population will more than offset any extra revenue generated in the future years.
When superimposed on top of the debt caused by the recent financial and economic crisis, which amounts to about 50 per cent of gross domestic product, the long-term demographic costs will push Britain’s national debt to worrying levels unless addressed.
The report will shy away from explicit forecasts on the extent to which Britain’s national debt burden will rise steeply over the next 50 years, in part because most who have tried to project the impact of higher life expectancy and lower birth rates have generated incredibly high figures.
Earlier this year, the European Commission forecast that unless action was taken to cut state pension costs and healthcare bills, UK public debt would rise from around 60pc of gross domestic product (GDP) this year to 160pc by 2020, 406pc by 2040, and 760pc by 2060. [One thing is certain and that is that these figures are rubbish, Because long before we reached 160 % nobody would lend us any more money! -cs] The Treasury attacked such figures as having “no basis in reality”, and is likely to use its Long-Term Fiscal Projections document as a rejoinder.
However, the long-term threat will do little to prevent the Chancellor, Alistair Darling, unveiling a pre-Budget report which is set to contain fiscal plans which are no more ambitious than those laid out in the Budget in April. At that point, the Chancellor pledged to reduce annual government borrowing from 12.4pc of GDP this year to 5.5pc of GDP in 2013/14. Since then, however, a variety of authorities, including the International Monetary Fund, the Organisation for Economic Co-operation and Development and a range of ratings agencies, have warned that the Budget plans did not go far enough. [He won;t be allowed to get away with that preposterously inadequate response -cs]
According to Philip Shaw, chief economist at Investec, the possibility that the election next year could result in a hung parliament will make the markets more worried still about the lack of Government action in reducing the deficit.
“In an ideal world, markets would prefer a significant fiscal tightening,” he said.
However, the Chancellor is likely to pitch the PBR not as a package of austerity measures but as a continuation of its efforts to prevent Britain from lurching into a full-blown depression.
He will warn that Britain remains vulnerable if there are any further Dubai-style shocks to the economic system. As a result, he will maintain that it would be foolhardy to try to reduce the deficit by any more than is slated in the Budget
This claim is likely to be attacked by the Conservatives, as will be Mr Darling’s decision to cut his growth forecast this year to -4.75pc, and his restatement of next year’s forecast of 1.25pc.
However, the PBR will be framed inside Labour circles as a pre-election trap for the Conservatives. Alongside the PBR, Mr Darling will commit to the new Fiscal Responsibility Bill, which will make it a legal obligation to reduce the deficit to 5.5pc within four years.
Labour insiders hope that, by spelling out this cut and giving signs about how it will go about reaching it, the Government will then be in a position to insist that the Tories would be forced either to commit to the plan or to spell out how they would go further. As such, Labour strategists hope to paint the Tories either as shallow, without policies, or as overly-austere spending cutters.
According to Michael Saunders, chief European economist at Citigroup, the Treasury’s refusal to present a deeper set of cuts could cause shudders of dismay in the markets, and provoke disapproval from the credit ratings agencies who determine the grading of government debt.
According to a range of experts at Morgan Stanley, UBS and beyond, Britain is at tangible risk of a fiscal crisis if it fails to tackle its deficit.
In the longer term, it faces another black hole altogether caused by the demographics described by the Treasury’s own report..
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SUNDAY TIMES 6.12.09
Chancellor Alistair Darling’s £40bn cut in public spending
UK to slide out of top 10 economies
David Smith, Economics Editor
Alistair Darling will this week tell government departments that the money has run out and they face a three-year cash freeze on spending.
The message, the toughest to be delivered by a chancellor since the last Labour government was bailed out by the International Monetary Fund in the 1970s, will mean public sector pay freezes and big job cuts. The cash freeze in Whitehall will mean a “real” cut of nearly £40 billion in spending over three years.
It comes amid speculation, played down heavily by Treasury officials, that the chancellor will introduce a windfall tax to curb bank bonuses in his pre-budget report on Wednesday.
They said the government wanted to see a revival of the City and the tax take from it and warned that a windfall tax could drive away business. Last month, after earlier speculation, government sources had denied plans for a windfall tax.
Darling is said to believe that public sector workers will have to match the sacrifices made by private sector employees during the recession in which government jobs and pay have continued to grow.
The chancellor’s tough message comes as a new report predicts that Britain will slide alarmingly down the global league table in the coming years.
The Centre for Economics and Business Research (CEBR) says Britain, which was the world’s fourth largest economy as recently as 2005, has slipped to seventh this year behind America, China, Japan, Germany, France and Italy.
By 2015, it predicts, Britain will be outside the world’s top 10, behind Russia, Brazil, India and Canada. Slow growth and a weak pound will be responsible for the slide.
“Public opinion in the UK has not yet caught up with the potential impact of this change,” said Doug McWilliams, chief executive of the CEBR.
“It means that, whether we like it or not, we are going to have to be prepared to put up with economic, political and social decisions made in other countries.” Britain would find it hard to maintain a seat at top diplomatic tables.
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The latest YouGov poll for The Sunday Times shows that the Conservative party is retaining a commanding 13-point lead, contradicting recent suggestions that Labour had narrowed the gap enough to make a “hung parliament” likely.
The Tory lead is fractionally down on last month’s gap of 14, but remains big enough to assure David Cameron of a comfortable majority.
The chancellor will this week say that Britain’s economy is on the brink of recovery and that growth will be strong from 2011 onwards.
The Treasury is also aware, however, that it has to convince the markets that it is serious about cutting Britain’s £175 billion budget deficit, which will be revised up by a few billion pounds this week.
Asked how the deficit should be reduced, respondents in the YouGov poll strongly favoured the main emphasis being on spending cuts over tax rises, by 52% to 30%.
Treasury sources have not ruled out tax changes in this week’s pre-budget report, which will include abandoning a planned increase in the inheritance tax threshold from £325,000 to £350,000 to sharpen up differences on the issue with the Tories.
They have played down the prospect of a “soak the rich” budget, however. Wednesday’s statement is not expected to include any changes in capital gains tax or a new raid on pensions.
Darling’s three-year cash freeze, to begin in 2011, will mean big cuts in real spending for government departments. Compared with this year’s expected £387 billion total for spending by departments, the equivalent by 2013-4 will be £351 billion.
“There hasn’t been a comparable squeeze over three years since the 1970s,” said Robert Chote, director of the Institute for Fiscal Studies.
That squeeze was followed by the “winter of discontent” of 1978-9.
The aim will be to offset some of this squeeze through efficiency savings, with the Treasury hoping at least to match the claimed £35 billion of such savings since 2007.
Gordon Brown, in a Downing Street podcast last night, said the pre-budget report would set out “the further savings needed to protect our frontline services, cut the budget deficit and go for growth”.
Officials concede, however, that the new “flat cash” era will mean big reductions for some departments. Darling is deliberately not ringfencing entire departmental budgets and will make it clear that he is looking for sharply improved efficiency and productivity across government.
Yesterday the Tories stepped up their campaign to prevent money being wasted on costly IT projects. Francis Maude, the shadow minister for the Cabinet Office, has written to Sir Gus O’Donnell, the cabinet secretary, calling for a moratorium on the £100 billion of government IT contracts in the pipeline.
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