Way Too Optimistic

THURSDAY, DECEMBER 10, 2009

Way Too Optimistic

The fiscal projections in yesterday's PBR - just like last April's budget - rest on economic growth assumptions that are ludicrously optimistic.

Here is the relevant table from the PBR (click on image to enlarge):

As we can see, GDP growth is assumed to bounce back in very short order to reach 3.25% pa from 2011-12 onwards. Over the five year forecast period from 2010-11 it is supposed to average 3% pa.

Yeah, right. In a world of over-indebtedness, zombie banks, and tax increases, that just ain't gonna happen, boys.

Consider:

1. The average of independent forecasts for more or less the same period (2010 to 2013) is just 2% pa - and that was collected and published by the Treasury itself (see here page 18).
2. Last time we had to tackle a fiscal crisis even remotely like the current one - in the 70s - GDP growth was pretty close to zero for the following five years: in fact between 1976 Q4, when the IMF arrived, and 1981 Q1, when Geoffrey Howe finally completed the necessary fiscal consolidation, UK growth averaged just 0.4% pa.

So what if we correct the Treasury's fantasy growth numbers? What happens to the projected budget deficit?

As we've mentined before, the Treasury's own rule of thumb says that one percent off GDP increases the fiscal deficit by 0.7 percentage points of GDP. Which as things stand comes to around £10bn in cash terms. 

But of course, that's cumulative. If GDP growth is 1% pa lower than HMT's forecast, by the end of 5 years, the fiscal deficit will be running £50bn higher than the Treasury forecasts. Well actually more than that, because by the end of 5 years, with all that extra borrowing, government debt will be £150bn higher than the Treasury projects. Which means interest costs will be higher. And even if we assume the government can go on borrowing at 4% (a very heroic assumption), that's another £6bn pa on the deficit - ie the 2014-15 deficit is £56bn higher.

Which means that if we take the average of independent GDP forecasts, by 2014-15 borrowing will not be £82bn as the Treasury projects, but more like £140bn - hardly any improvement at all on this year's £178bn.

And if we take our post-IMF growth experience from the 70s as a guide, borrowing in 2014-15 will be... gulp... can this be right? £228bn (equals (3.0 minus 0.4)times £56bn plus £82bn).

And you know, it could be even worse than that. Because HMT is making some fairly optimistic assumptions about the recovery of tax revenues from the finance and property sectors. Plus, it's assuming unemployment stops rising in 2011 - back in the 70s, our joyless jobless stagnation saw unemployment go on rising fornine whole years.

Right that's enough. I'm off out now to a fiscal workshop under the chairmanship of Evan Davis. Maybe he's got some answers. Or at least, a stiff drink.

WEDNESDAY, DECEMBER 09, 2009

What A Shocker

Labour's final Pre-Budget Report (PBR) was a real shocker. Key points:

• Borrowing - no action to cut borrowing faster than the leisurely pace set out in the April budget, and the Treasury forecasts rest on the ludicrouslyoptimistic assumption that our GDP growth rate will soon return to 3.25% pa; the UK has been left as the developed world's borrowing basket case, and a catastrophic capital flight is that much closer.
• Tax - no action to cut taxes in order to boost growth; on the contrary, the tax on jobs (National Insurance) and other taxes will be increased by £5bn pa (2012-13); the tax on bonuses seems to be the worst of both worlds - given the City's imaginative tax lawyers, it definitely won't raise much revenue, yet it has sent a very negative message to those footlose international financiers.
• Spending - far from cutting spending, incredibily, the PBR increases it - by £5bn pa (2010-11); moreover, there is virtually no detail on how future expenditure restraint will be delivered - it's simply assumed that savings can be found somehow to provide for Labour's "ringfenced" areas (ie schools, hospitals and police)

So overall, they got pretty well everything wrong.

But in reality of course, nobody expected Labour to deliver any sense in this PBR. As we've blogged many times, the financial markets and everyone else who matters wrote them off long ago. The real test will come when George stands up to deliver the real budget next June. 

And if George gets it wrong, we really will have to get out.

World Basket Case? It's Us

When Darling stands up at lunchtime to deliver his Pre-Election Budget Report, he will doubtless repeat the old formula about how they're innocent victims of global circumstance. The reality is that Labour have dropped us into a fiscal hole bigger than that of any other OECD member - including the supposed basket cases of Ireland, Iceland, and Greece.

Here are the OECD's lastest borrowing league tables for 2010 and 2011 (NB to make the chart clearer, we've reversed the sign on the financial balance - ie higher is more borrowing):

Tyler will be spending the day round at the TPA's fortified bunker close to the frontline. We'll be trying to work out what's really going on through the smoke screen, and we'll be posting our conclusions on the TPA's site.

TUESDAY, DECEMBER 08, 2009

Wonderful Wonderful Copenhagen

The biggest bunfight in world history

No time for a proper blog today, but as you watch the wall-to-wall BBC/C4 coverage of the Copenhagen grandstandingfest, we wanted to make sure you've got the TPA's analysis of the costs in front of you (see TPA research note here, andMail article here).

Overall, the direct cost to taxpayers is estimated at £130m. This comprises the travel, accommodation, food, and salary costs of the 15000 - yes, 15000 - government delegates who will be attending, plus the cost of the facilities and security.

In addition to those 15000, there will be 5000 media and up to 45000 warming activists in attendance. The BBC has sent an extraordinary 35 people - all at our expense - and in the case of UK activists, you can bet many of them will be in receipt of government funding in one form or another.

But the good news is that Copenhagen's prostitutes are offering their services for free on production of a conference pass. Prostitution is pefectly legal in Denmark, and according to Susanne Møller - spokesperson for the SIO (the Sex Workers Interest Group) - climate scientists will be given the warmest of warmist welcomes:

"If you have a lab coat and a hotel bar receipt, your emissions will be peer-reviewed at local brothels until Dec. 18."

Enjoy.