A few more figures for those who like them

My concern about the UK economy has centred around the large banking sector relative to National Income and tax revenue, the large consumer deficit, and the growing government deficit. I have felt the government has been running too much financial risk, whilst the economy itself will enter a period of no growth followed by relatively slow growth.

All this seems to be endorsed by the government’s own heavily revised forecasts, published yesterday. They foresee growth for 2008 at 0.75%, with falls in quarters 3 and 4, followed by a fall of 1% next year, and growth of 1.75% in 2010.
Private sector forecasters are likely to see this as optimistic, with more fearing a continuation of the downturn beyond the second quarter of 2009. The UK’s growth in the last decade owed a lot to the success of banking, property, financial and business services, areas which are entering difficult times.

The government’s own finances are deteriorating sharply. The Chancellor told us he planned to borrow £78 billion this year compared with the last Budget forecast of £43 billion. The back of the new Forecast book shows that when the bank share buying and other financial transactions are taken into account, his cash requirement from markets and National Savings amounts to £157.7 billion. This will be followed by borrowing well over £100 billion the following year. This will be a big burden on the UK gilt market, even allowing for the demand from pension funds. Much of it will be borrowed for relatively short periods, leaving a refinancing hump early in the next decade. The trajectory for getting things under control again is long and leisurely, with the current budget not reaching balance until 2015-16.

How has he got into such a position? There are three main reasons, The biggest increase in borrowing comes to buy bank shares and nationalise smaller banks. I have been using the figure of £58 billion for 2008-9 for this programme. For the first time the government sets out more detail. Their current estimate for this year is now £69 billion. Apparently there is a £5.7 billion working capital facility for Bradford and Bingley, and £8.1 billion for the Icelandic banks to add to the amounts in my figures, whilst the government figures do not appear to include the extra share capital for Northern Rock as this was a transfer from lending to them. We agree about the £37 billion for the three banks in the share buying programme and the £18.2 billion paid to Abbey for Bradord and Bingley.

The second biggest change is the collapse of tax revenues. This year they anticipate a revenue fall of £30 billion, to be followed by a huge dip of ££64 billion next year excluding the policy change on VAT.

The third change is a series of policy alterations in favour of more spending and lower taxes. The £8.6 billion next year off VAT is the largest.

The figures reveal too much financial risk and too much borrowing. The government is now in the hands of the money lenders. It was once famously said “We do not own the nationalised industries, they own us”. The government will have to learn that lesson all over again with its expensive habit of buying banks.

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15 Comments

  1. AndyC
    Posted November 25, 2008 at 11:33 am | Permalink

    Hello, in their 'at a glance' web page, the BBC are saying this morning that borrowing will be 78 billion this year. From looking at page 224 of the PBR, that would seem to be a simple mistake, or am I missing something?

    Does the 157 billion figure roughly equate to the old PSBR? Sorry for the questions, it's a long time since I studied any of this in detail. Based on the evidence of the past decade I'm assuming there's a lot of smoke and mirrors going on.

    reply: the BBC parrot Darling's wrong figures. His numbers leave out all the bank share buying which is revealed later in his document and is part of the borrowing.

  2. Letters From A Tory
    Posted November 25, 2008 at 11:44 am | Permalink

    It's amazing how insignificant the sums invested in Northern Rock seem when compared to how much the government needs to borrow in total.

    Those growth forecasts look a little optimistic, given that growth forecasts have already been slashed since the Budget in March 2008 but will magically stabilise by next year.
    http://www.lettersfromatory.com

  3. Blank Xavier
    Posted November 25, 2008 at 12:31 pm | Permalink

    Financial alcoholism. The Government has is borrowing like crazy and refuses to admit there is a problem. Just to make the matter even clearer, they are pushing through tax cuts funded by borrowing. Pure madness.

    What I note though is that the Government is doing everything to avoid *permanent tax cuts*. I think this is because doing so requires *permanent reductions in Government spending*.

    Even now, in the face of catastrophe, Government priority appears to be protecting Government spending.

  4. Acorn
    Posted November 25, 2008 at 12:40 pm | Permalink

    Osbo' was good yesterday, excellent rebuttal Job. Particularly because the plebes don't understand that he does not have access to the real numbers. The fact that civil servants work exclusively for government ministers and NOT for parliament as a hole [sic], is another major failure of our, so-called, democracy.

    (Did I mention that it would be a good idea to separate the "executive" – ministers – from the "legislature" – parliament.)

    As it now appears that the world's monetary system is moving on to the balance sheets of the world's central banks; it may be time to have a "world" central bank to design a new set of rules to keep governments honest. Like doing away with off balance sheet accounting by central banks and government treasuries. Perhaps, a limited number of derivatives with a standard, global specification – options; futures and swaps – that are openly traded through a price transparent market maker.

    FSU is saying that UK government debt will hit £2,140 billion by 2013; 160% of GDP. I haven't got a clue if that is right or wrong. That would put us similar to Japan; but, Japan has a large current account surplus, the UK is the opposite.
    http://www.financialsense.com/fsu/editorials/wala

    For those who may want an IE forms spell checker:- http://www.iespell.com/download.php

  5. backofanenvelope
    Posted November 25, 2008 at 12:53 pm | Permalink

    What needs to be done is simple. Slash public spending. Deleting all Quangos would save 128 billion in two years and would have very little effect on unemployment. Have a look at http://www.thesun.co.uk/sol/homepage/news/columni

  6. Neil Craig
    Posted November 25, 2008 at 1:24 pm | Permalink

    TYhanks for providing a site that will put raw numbers vefore us rather than spin. The government intends to increase national indebtedness by £512 billion (36% of GNP) & with the tiny exception of not increasing corporation tax onl small businesses by 2% there is nothing in this which will improve competitiveness or solve our basic structural problems. Indeed government is to increase by 1.2% next year as the economy declines 1%.

  7. Jonathan Cook
    Posted November 25, 2008 at 1:57 pm | Permalink

    John,

    I'm not old enough to remember the fallout last time the UK went to the IMF to bail us out.

    If the country goes bankrupt where do we stand? What are the key things we need to know or be aware of?

    I see today that UK gilts cost three times more than those of Germany or the US to insure. The omens don't look good.

    If we are made bankrupt – surely this changes the whole debate about joining the Euro? We'd need to dive into the Euro for protection wouldn't we? I'm loathe to join the Euro until we have democratically and accountable politicians in Europe, but I'm wondering if the UK can go it alone any more.

    Reply: We would have to seek international loans from IMF etc and accept their terms which would include spending cuts.

  8. The Wilted Rose
    Posted November 25, 2008 at 1:59 pm | Permalink

    So much for Labour being against taking "excessive risks"!

  9. Blank Xavier
    Posted November 25, 2008 at 2:29 pm | Permalink

    I noticed with some surprise today just how far the pound has fallen. It this keeps up my income (which is in euros) will go a long way in the UK.

    On a related note, the prospect of devaluation is in Latvia now affecting freedom of speech. The secret police have been arresting and briefly (day or two) detaining people for publically speaking out about the risk of devaluation – on the basis that spreading false rumours about the financial system is a crime.

    It's disturbing, to say the least, that the Government is deciding what people can or cannot talk about in public.

    It has of course paralyised public debate and the exchange of information on the matter. Latvians are being decieved, by the State, into holding lats. Of course, from the POV of the State, they're doing it "for the good of the people", since if the truth was known, the lat *would* devalue, so trying to keep it hidden is their best bet.

    They are however in that position in the first place because the Government spent like there was no tomorrow. There is a zero percent chance of devaluation being avoided; but since the Government has made the decision to hang on and is suppressing discussion, this issue is not open to debate.

    The people owning lats are going to see all their assets and debts go to zero. Those who saved are destroyed, those who borrowed do very well, just like Iceland, and they have no chance to take any steps now to try to rescue themselves in any way, because the Government is not permitting – by the use of the secret police – them to know about this problem.

    The logic of withholding information from people "for their own good" is awfully seductive to Governments.

    The recent news about ID cards, large fines for not informing the Government when your name or address changes, are propertly tantamount to you being required to explain your private life to the Government "for your own good" (to prevent terrorism).

  10. not an economist
    Posted November 25, 2008 at 3:57 pm | Permalink

    Some more figures but relating to the American economy, just so people can draw a contast with our Labour govt and maybe an indication where the future lies for our monetary policy:

    From the Bloomberg site:

    "Nov. 24 (Bloomberg) — The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago."

    The link is as follows:
    http://bloomberg.com/apps/news?pid=20601109&s

    I don't care how much people want to cite the fear of deflation, increases in the money supply on this scale can only lead to scary levels of inflation. I wonder how long before we find ourselves flexing our money supply to the same degree (as a proportion of our GDP that is, although Gord and Alistair may want to go the full nine yards and match Bernanke in absolute terms).

  11. DiscoveredJoys
    Posted November 25, 2008 at 4:29 pm | Permalink

    Frightening figures. Truly frightening.

    Just to put them in perspective… the 'stimulus' amounts to: "Buy a nice digital camera for £100, and get a free cup of cappucino".

    Hardly compelling.

  12. Mark Wadsworth
    Posted November 25, 2008 at 6:28 pm | Permalink

    Of course our 'banking sector' is disproportionately large. We've just had a credit bubble and property price bubble (you can't have one without the other).

    This was the fourth big bubble since 1945. It always ends with a property price slump, credit crunch, recession etc. You can see why people get drawn into property speculation – it's little effort, apparently low risk and taxed at very low rates.

    So why not go back to the root cause of recessions – the property price bubble – and shift some of the burden of taxation away from incomes and production and investing, and towards property ownership, to dampen the bubbles while lifting the burden on the productive economy? (within the overall confines of reducing the overall tax burden significantly, of course!)

  13. A. Sedgwick
    Posted November 25, 2008 at 6:45 pm | Permalink

    My recurring question in recent days and weeks is who is going to lend these now published vast and yet optimistic figures? One section you have pointed out is the ripped off current and future pensioner being forced to buy an annuity funded by Gilts. This system is pernicious and counter productive and it is possibly unique for a politician to highlight the issue. It seems to be a no go area, but the working public are not stupid and many have woken up to the fact that they lose 75% control of decades of savings for a dubious return and minimal tax relief. When company final salary pension schemes were the norm this requirement was less significant, but now most private pension funds have to be funded from an individual pension pot. Consequently many people have given up pension funds for property, another reason for the housing bubble, or are saving the minimum required by their scheme. This has the effect of reducing savings and increasing those dependent on the state in old age. The chances of this system changing in the current financial black hole of debt are nil, but if the Conservatives are really about wealth generation, standing on your own feet and providing for your family this accumulated money over a lifetime must not be absorbed to pay national debt but should be a savings

    Reply: foreign investors, individual UK savers, pension and insurance funds etc

  14. mikestallard
    Posted November 25, 2008 at 7:18 pm | Permalink

    What concerns me is the vagueness of all these figures which are being bandied about.
    I noticed that a government minister on PM started talking about a debt of "a hundred trillion pounds". I cocked an ear and he then went on to say ""tens of trillions of pounds". The interviewer, of course, let it all pass.
    In some figures which I looked up a year ago, the entire annual government expenditure on the army was just under £40 billion. Now you tell us that the shortfall in the estimates was £30 billion!
    According to the Telegraph this morning, the entire annual government expenditure last year was just under £600 billion. I had it down as just under £700 billion.
    Now we are hearing trillions mentioned quite regularly, certainly in relation to personal debt.
    You are so right: the government must unload the banks p.d.q. and manage the government expenditure properly. It would be awfully nice, too, to see a little reform of the complicated tax system.
    It must be very frustration to see all this going on while you, John, sit on the opposition benches staring at acres and acres of empty Labour seats!

  15. Coeur de Lion
    Posted November 25, 2008 at 10:11 pm | Permalink

    Hey, didn't I hear a promise to recompense people should their bank fail (up to£50K)? Does this appear on the liability side anywhere? Was it mentioned yesterday? Could be big money!!!

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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