While we wait for Darling’s Pre-Election Report [formerly Pre-Budget Report] here is a reminder of Where We Came From, How We Got Here, and Who Led Us Here!
Christina
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TELEGRAPH 9.12.09
Pre-Budget report:
After Brown's Fantasy Budget of 2007 it's time for Britain's hairshirt
If you were after proof of how wrong Gordon Brown and the Treasury got the economy, you could hardly do better than digging out Budget 2007.
By Edmund Conway
The document – "Building Britain's long-term future: Prosperity and fairness for families" – ought to be preserved as a monument to hubris. A flick through its pages underlines just how much the economic frame of reference has been turned so dramatically on its head since.
There is, in hindsight, a thick coat of dramatic irony on everything from the blithe economic forecasts (2.75pc in 2009, rather than the 4.75pc contraction the Chancellor will today announce) to the confident economic intent.
For instance: "Over the past 10 years, the Government's macro-economic framework has delivered more stability in terms of GDP growth and inflation rates than in any decade since the war. This historically low volatility puts the UK in a strong position to respond to the global economic challenges of the next decade."
This from the team who brought you Northern Rock, RBS and the worst deficit in British peacetime history.
Or take the document attached to the 2007 Budget, which predicted that not only would the public finances look rosy that year, but also the next year, the one after that and so on, all the way until half-way through the century.
The fact is that the economic landscape today is essentially unrecognisable in comparison with the 2007 outlook. Alistair Darling will deliver today's pre-Budget report with Britain still stuck in the deepest recession since the 1930s. The scale of the deficits to be generated this year and for the foreseeable future will be bigger than any encountered since the Second World War – bigger than when Britain was bailed out by the IMF in the 1970s. According to that self-same institution, Britain will have to don a fiscal hairshirt more severe than any of its other developed counterparts (save Japan) if it is to bring its finances back to reasonable order over the coming decades.
These are symptoms of a disease that is far more chronic than the simple financial crisis. They symbolise an economy which has been mismanaged into long-term sclerosis. Public spending has risen from around 36pc of GDP at the turn of the century to 41pc before the crisis, according to Policy Exchange, and may balloon above 50pc of GDP next year. Even if this were affordable, it would be a major worry: studies show economies dominated by state spending are less efficient, less dynamic and doomed to falling living standards. There is growing evidence that this is already happening – for instance the fall in education productivity recently uncovered by official statisticians.
Moreover, it is not affordable: the idea that even a small increase in spending could be financed has been shattered by the crisis, which has taken with it as much as a quarter of the annual tax revenues the Government had relied on. The only solution is to adapt to this world by cutting spending and, if only temporarily, raising taxes.
This is no secret. The Treasury is well aware of it. The question is the degree to which the department's political masters face up to it today. Much as he is regarded as increasingly independent (of Mr Brown), Mr Darling is a politician who, both publicly and privately, remains determined to win the next election. To what extent will he obfuscate the specifics of the pain needed to restore the public finances to health?
The economic logic is inescapable. As Moody's hinted yesterday, Britain's credit rating is at risk. As Greece has shown, the big risk this and next year is of a fiscal crisis. But the Treasury has avoided external warnings before. Fantasy Budget 2007 was produced even as the IMF was issuing shrill warnings over the public finances.
Before you listen to today's performance, remind yourself of the Treasury's pledges it laid down then: "Maintaining macroeconomic stability, ensuring the fiscal rules are met and that inflation remains low"; "raising the sustainable rate of productivity growth"; "providing employment opportunity for all... a higher proportion of people in employment than ever before".
Results respectively: fail, fail, epic fail. Let us hope today's PBR ages rather better.
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