UPDATE: 1730 CLARIFICATION: The forecast of 2.6% growth for 2011 the Treasury published in February was not the Treasury's own but that of independent forecasters. But not any old group of forecasters -- instead, a small, select group on whom the Treasury depends when making its own forecasts. Nor at the time did Treasury officials give us any reason for thinking that their 2.6% was pessimistic; yet now, to justify their optimistic 3.5% prediction, they say privately that these forecasters are "just plain wrong"!Worse than we feared?
But perhaps things are even worse than that. Consider, for a moment, that the Chancellor, despite his grave demeanour throughout his Budget speech, was actually being, well, a tad optimistic.
Take his forecast that the economy will suddenly rebound from the doldrums to a robust 3.5% growth in 2011. I don't know any independent forecaster, in the City or in the media, that thinks that even remotely likely. Indeed, only a few months ago the Treasury didn't think so either.
In its February forecast it predicted growth of only 2.2% in 2011 and 2.6% in 2012 and 2013. Now the Chancellor is telling us the economy will grow by 3.5% in all of these years. I cannot for the life of me think what has changed in two months to switch the Chancellor and his department from prudently cautious to wildly optimistic. We will seek an answer on the Daily Politics.
Then there are the debt forecasts, which the Treasury has a knack of consistently underestimating: £800 billion from the financial year just ended to the end of 2013/14. Within these six years the Chancellor plans to borrow more than the accumulated debt of every Chancellor in British history, in nominal terms, since the position emerged in the 18th century. But maybe he will have to borrow even more.
After all, if the Chancellor is overly optimistic about the return to growth then his tax revenue will be even less than he's anticipating and his spending (in the form of welfare payments such as unemployment benefit) will be greater.
The Chancellor is already forecasting that by 2013/14 accumulated national debt will be around 80% of our annual national wealth (GDP) -- twice the level when Labour came to power in 1997. But it will soar above that if he has to borrow more and if you take into account off-budget borrowings (such as Network Rail, state guaranteed PFI schemes) and the rising cost of the bank bailouts then it is perfectly possible that we could soon be borrowing 100% of our national wealth.
The danger in that is that Britain would then risk its triple A rating in international credit markets. That would be humiliating and embarrassing -- and force the government to pay higher interest rates on its debts (because it was more risky), thereby making it even more expensive to service. Among the many things buried in the small print of the Budget Red Book, over which we'll all be pouring for some time, is the revelation that the government is planning to borrow £220 billion this year -- much more than had been anticipated. So maybe even the Treasury thinks it will have to borrow more than the Chancellor is forecasting.
One way the Chancellor is telling us the debt will be repaid is by increasing taxes on high earners (which doesn't include the rich who've inherited their wealth and don't pay anything like the taxes of those who've had to strive for their wealth): the top rate of income tax, which was to rise to 45% in April 2011 will now be 50% -- and click in from April 2010.
This will no doubt appeal to Labour's core, the Liberal Democrats support it and the Tories are strangely reluctant to oppose it. But when you're racking up debts of £800 billion it is largely symbolic: the Treasury says it will bring in only around £1 billion in 2010/11 and less than £2 billion the following year -- and that's on the Treasury's static model which assumes every high earner will actually pay the higher marginal rates.
The independent Institute of Fiscal Studies uses a more dynamic model which rightly assumes some high earners won't (for example, they might leave the country, stop working or pay themselves anything above £150,000 in tax-free pension contributions). It recently concluded that the proposed 45% would not bring in ANY extra revenue and indeed might actually generate less. We will wait with interest to see what it makes of the new 50% rate.
Threats that high earners will leave the country are often dismissed as propaganda and no doubt they often are. But a 50% top rate of income tax means Britain will have the third highest top rate in the industrialised world -- only Sweden (55%), Denmark (59%) and Netherlands (52%) will be higher while America (35%), Canada (29%), Hong Kong (16%) and Dubai (0%) could start to look even more tempting to Britain's high fliers, especially now the streets of the City are no longer paved with gold and there are mumbles among them that the Budget of 2009 represents the end of New Labour.
Good riddance to bad rubbish, you might say, and if we see the back of some of the bankers who've brought us to our knees you might be right. But the top 5% of income tax payers account for half of all income tax receipts. You don't want to lose too many of them when you're already planning to borrow £800 billion.
Wednesday, 22 April 2009
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