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.