Parliament will be the last to hear the budget

The UK budget has been well advertised in advance. Gone are the days of budget secrecy followed by the drama of the Chancellor’s presentation in the Commons. I do not expect Mr Darling to resign over all the leaks, even though I have heard media commentators say particular leaks came from the Treasury. We receive some of the Budget in the Autumn Pre Budget Report. Now in the week before the budget the jobs package, the housing package, the green cars initiative, the extra £10 billion of spending cuts and the other main runners for inclusion are briefed to the press.

There may be the odd surprise tomorrow, but it is unlikely to be anything of a magnitude that will have much impact on the economic outcome. A £1 billion housing market package is hardly going to be decisive after all the billions already tipped into housing finance through the public sector programme and through the bail outs of the mortgage banks. A few billion here and there to help jobs, green growth and the like are not going to have much impact. This is a £1,500 billion economy so the odd billion is small.

The economy’s progress will be determined by three things. The first, the large cuts in interest rates announced in recent months, points to economic recovery by 2010. This will be reinforced by printing money, or underfunding the government’s spending. The second, the poor state of the banks, will hold back the recovery as it did in 1990s Japan. The more the government subsides them to delay sorting out the problems, the longer it will take to have a strong recovery. The third, the state of the public finances might not give the boost the government imagines. The budget needs to persuade the markets that there is a way out of the very large deficits the Chancellor will have at last to recognise. He needs to convince us that they can be financed in the short term at sensible interest rates, and will be controlled in the medium term by some combination of lower spending and more tax revenue. If he cannot, then we face higher longer term rates of interest early in the cycle. Quantitative easing is not having much impact on longer term rates, and cannot continue indefinitely.

The Chancellor will probably adopt his predecessor’s tactic of giving some of the following years’ budgets at the same time as 2009-10’s. We will probably hear plans to rein in wasteful spending more in later years, and plans to increase taxes more after April 2010. Given the likelihood of an election in May 2010 none of this will cut much ice.

The Treasury will need to produce some more credible forecasts of economic output for both 2009 and 2010. We should expect them to say there will be slow growth in 2010 after a bigger drop in 2009 than they have so far admitted. The size of this drop will have a marked impact on the level of the public deficit, as the numbers are very sensitive to levels of output. If they admit to say a near 4% GNP decline in 2009, that will boost benefit spending and cut tax revenues substantially, driving the borrowing requirement higher. They are likely to go for a more modest forecast of GNP decline, hoping that the action taken to date will cushion the fall, and wanting to keep the public spending and borrowing figures down a bit.

The reality is slower growth for some years to come, once recovery does belatedly get underway. Four of the turbo chargers on the UK economy in the decade up to 2007 may no longer apply. The rapid growth of credit and the fast growth of property prices is unlikely to be repeated soon. The high level of inward migration is likely to reduce as a result of fewer jobs on offer and tougher immigration policies restricting numbers. The lead sector, banking and financial services, will not be able to sustain its own heady performance of recent years. Public spending will need to be restricted, after years of rapid growth.

On the positive side there can be more growth in exports and import substitution on the back of a weaker pound and better control of wages and salaries. The UK needs to save, invest and export more, and spend, borrow and import less.

The truth is domestic policy has done huge damage to this economy, first making it lop sided then bringing it crashing down. The government has been way behind the curve in responding, and its forecasts have been lamentable. Mr Darling may claim to have thrown the rose tinted spectacles away, but he will still be on the spend and hope strategy to try to get him through to the election. This, after all, is a government which thought house prices were rising because they were not building enough houses, which clearly had no idea just how much credit they were pumping in to the system. Or maybe it was just a government who thought they could borrow more than all previous governments combined and get away with it.

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20 Comments

  1. Brian Tomkinson
    Posted April 21, 2009 at 8:32 am | Permalink

    What is farcical about these leaks, which as you say are now being attributed directly to the Treasury, is that when interviewed about specific leaked proposals ministers will say something like “these are matters for the Chancellor”. This is just a cynical manipulation of the media to project messages to what is thought to be a gullible public. Tomorrow, however, Darling will have to explain why his previous predictions for the economy and the borrowing requirements were so grossly inaccurate. If he doesn’t present a credible explanation (which would appear unlikely on past performances) why should anyone believe his future forecasts? The time has come for a general election before this calamitous situation gets even worse.

  2. Posted April 21, 2009 at 8:41 am | Permalink

    Parliament will be the last to hear the budget

    Perhaps MPs should read the papers, then! ;o)

  3. Posted April 21, 2009 at 9:45 am | Permalink

    Somebody could ask the Chancellor, tongue in cheek, if he is going to hold a leak enquiry & if he will call in the policy as in the damien green show.

    I am increasingly coming to believe that it is not so much the +50% pf the economy that is government spending that is the worst problem but the 50% which is government regulation (fortunately the government regulates itself or we would all starve). So long as our electricity costs 4 times what China’s does, we are prevented from building houses, the HSE regulations absorb the work of 4 million peopleEU regulations cost us £70 bn a year & £579 of the £625 cost of the Millenium Dome was regulatory we are never going to be able to compete with China.

  4. Posted April 21, 2009 at 10:06 am | Permalink

    What will not be in the Budget speech is that a lot of people have already taken serious damage, in addition to those who have lost their jobs and those who have negative equity or other housing problems. This damage will contine, and for very many be permanent. It will not be alleviated by the trimming and fiddling or other headline initiatives, and least of all by high cost prestige projects. The end result will be a public sector economy, with private appendages largely foreign owned by companies based in tax havens. Just how is this going to provide for all the things that the Government will promise? It cannot and it will not, so just how long will it before we capitulate to the Euro, and end up as the dumping ground for Europe?

    • The forgotten few...
      Posted April 22, 2009 at 5:44 am | Permalink

      I am currently very worried on how permanent my damage experience will be. For personal reasons I took a “career break” in 2007 and now I find it extremely difficult to find a job and have been looking since half way through last year. Every day, it gets worse. I am not a statistic either, as I am not registered as unemployed. How many more are out there like me?

      Ironically, I chose my vocational “career” route – I am a qualified ACA – to be sure of employment. Little did I perceive what the future held or how much damage this Labour government could inflict on the economy. I expected a damaged economy because that’s what history shows as repeating itself with Labour. However, I did not expect or anticipate the government’s version of economic euthanasia.

      But I am not down and out yet and am about to embark on a full day of networking, with CV in the attendant luggage.

      I will never, ever give Labour the time of day again & will employ the same tactics on them as I successfully inflict on Sky reps who call at my door (far too frequently).

      Labour’s mortgage relief scheme – details of which were announced yesterday – is another gimmick, by the way: the small print exclusions mean that few will be able to apply. I am sure the budget will prove as excruciating; now that we have had most of the “positives” leaked, it’s going to be take, take, take.

      What I’d like to know, living in this so-called western democracy that is the UK: how on earth can one government be able to be so spendthrift with taxpayers’ money without even a decent debate in the Commons, let alone a vote?

      • Lenny dawes
        Posted April 22, 2009 at 9:22 am | Permalink

        JR – are you contributing to your own page again!

        • The forgotten few...
          Posted April 22, 2009 at 9:31 pm | Permalink

          No, he’s not. I preferred to remain anonymous in that comment and hope you can understand why. I read john’s blog because I see common sense. Hence perhaps, the appearance of an echo.

  5. Jim Pearson
    Posted April 21, 2009 at 12:25 pm | Permalink

    Even YouTube is now a preferred platform for policy announcements. Gordon Browns attempts to set himself up as the anti-sleeze lord of the universe is very unbelievable. This governments contempt for debate is staggering

    • Citizen Responsible
      Posted April 22, 2009 at 11:59 am | Permalink

      It seems our Gordon is trying to emulate the Youtube success of politians such as Daniel Hannon and Barack Obama. Dream on!

  6. JohnBoy
    Posted April 21, 2009 at 1:05 pm | Permalink

    Would be interesting to see if an explanation is given for moving the banking of CT & IT receipts to RBS.

    I vaguely recall “No reward for failure” badied about.

    http://www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId=1082302809

  7. Acorn
    Posted April 21, 2009 at 3:11 pm | Permalink

    Make sure you do your prep tonight for the budget JR, we may be asking questions:- http://www.ifs.org.uk/bns/bn83.pdf

  8. Posted April 21, 2009 at 3:48 pm | Permalink

    I always enjoy reading articles like this because they explain, in simple uncluttered language what is really going on. Do you know what? We are British and we can take it. Bring it on.

    However, I would like to add the two following things which you forgot to mention:
    1. A announcement that all single mothers will get 50p for a free healthy snack for their eldest child*. Cost £25 million pounds.
    2. An announcement that bureaucracy is going to be cut back with immediate effect. Total cost £30 billion pounds.

    *This does not apply to people living in England.

    • Deborah
      Posted April 21, 2009 at 4:58 pm | Permalink

      Thanks, Mike – that made me smile.

  9. Robin
    Posted April 21, 2009 at 4:19 pm | Permalink

    If the Conservatives lost a high-profile, bloody and bruising fight to get the budget voted down in favour of many more efficiency savings in quangos and beauracrats it would have the result that the Labour Party had made its intentions clear that they had no intention of reforming public services.

    • Deborah
      Posted April 21, 2009 at 4:59 pm | Permalink

      If only

  10. Posted April 21, 2009 at 9:26 pm | Permalink
  11. Posted April 21, 2009 at 10:23 pm | Permalink

    I would make the following forecasts.
    1. The Chancellor’s forecasts will show a deeper and more prolonged recession, but not as pessimistic as independent forecastors.
    2. He will forecast government debt to peak at around 70% of GDP, higher than the 57% predicted last November.
    The forecast is based on the mindset of the government. Forecasts are no longer the best that can extracted from the data available, but a delicate PR exercise to help the next opinion poll.
    3. The surprise package. There has to be one to raise extra revenue. I think there will be talk of the budget being used to tackle the long-term problems of society & the environment. So booze tax will go up, along with more tax on motorists. As fuel bills are reducing, maybe a phased harmonisation of VAT on gas & electric to the standard rate?

    I hope that £1bn housing package is a complete waste of money, or even better that it just a publicity stunt with no substance. Whilst the economy is shrinking rapidly and unemployment rising it is unwise for individuals to take on more debts, or banks to lend money where there is a high risk of default. If the housing markets are artificially lifted now it will only be by jeopardising a genuine and sustained recovery later.

  12. jim
    Posted April 22, 2009 at 1:30 am | Permalink

    You are way too optimistic on any recovery. The IEA has reported that production of conventional oil is now falling at about 9% a year. If all of this new printed money does start a recovery, it will be quickly killed off by a rise in the price of oil. Until we seriously begin to develop cost efficient alternatives there will be no recovery.

  13. TomTom
    Posted April 22, 2009 at 3:08 am | Permalink

    There can be no recovery without Confidence and there can be no Confidence without an Election

  14. Robin
    Posted April 22, 2009 at 6:15 am | Permalink

    Based on an optimistic revenue – debt repayment model at the bank I work at I calculated starting with a 3% absolute reduction in public sector spending every year over the next 5 years (i.e. a 15% cut), then a 1.5% absolute reduction every year over the following 5 years (i.e. a futher 7.5% cut) will bring the Government debt back to a position where it can be reduced. To get the same result you can increase taxes by 10% over 5 years then a futher 5% over 5 years. Anything less will mean the debt will take longer to be reduced. You can work backwards from there.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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