The government wants to increase spending, and therefore borrowing, to help us out of recession.
We need to distinguish between the several different ways in which borrowing will rise in the next few months. Some are inevitable and some are avoidable.
Borrowing will rise because:
1. The government is buying controlling interests and shareholdings in banks, and may do this in other types of company in due course.(it has already bought a railway company)
2. Revenues will fall as the private sector makes less profit, carries out fewer transactions and earns less money.
3. Expenditures will increase as more people need unemployment and related benefits.
4. The government may increase spending on projects to create jobs.
5. The government is increasing spending anyway, assuming the economy would grow.
Only items 2 and 3 are unavoidable.
Item One is so far the most expensive, boosting borrowing by more than £40 billion ( cost of shares so far in Rock and the latest 3 bank package), and the most contentious.
Item 4 could make sense if overall borrowing was under sensible control. It is more dangerous as a policy where borrowing is thought to be high, as total high borrowing may reduce market confidence causing problems with raising borrowing at sensible interest rates and adding to inflationary pressure through lower sterling.
Item 5 includes a big build up in administrative central government and quango staff entailing large increases in the public sector pension and pay bills. The increase in this should be stopped as the rate of growth in the economy has slumped.
The most worrying one is Item 2. The government needs to think hard about how much revenue it can collect in the next couple of years, and about the sustainable revenue for the future.
Taxes on property will be sharply down this year. There will be far fewer transactions, and prices are falling, slashing Stamp Duty and other transactions taxes.(CGT, VAT, Income Tax on these). The government should not assume a sudden bounce back in values and volumes in a year or so.
Taxes on corporate profits will fall sharply, reflecting lower profits, especially in the financial sector which has played such a large role in recent UK growth. Again, the government should not assume a sudden bounce back in banking and related profits in a year or so, especially if several banks are still nationalised.
Profits on oil and gas will fall from recent peak levels as energy prices have fallen so far. There is more possibility of a bounce back when the global economy recovers.
Taxes on high incomes will fall, as we have to assume that the high bonus culture of recent years will be adjusted downwards for the lean times ahead. Taxes on other incomes may not fall in cash terms, as there is still some pay growth, but the rate of increase will be much reduced by unemployment and slower pay increases.
VAT receipts will be damaged by fewer and cheaper transactions. This will recover when the economy picks up.
A prudent government would only borrow that portion of lost revenue which will pick up again when the economy moves back to some growth. There will be substantial permanently lost revenue. It would not be prudent to plan to spend that in future years.