The Budget book of June 2010 said UK GDP would rise from £1.4 trillion in 2009-10 to £1.8 trillion in 2014-15. This includes 13% real growth, plus some inflation.
Taxes would increase from £480 billion to £ 656 billion.
Let’s leave out the inflation and just concentrate on the real growth. If instead of 13% we have 10%, a medium growth result, GDP would be around £50 billion lower in 2014-15 than planned. Tax revenues would be at least £20 bilion lower.
Let us assume a slow growth result. If the UK economy now has a trend rate of say 1.4%( as we advised before and after the election in the Conservative economic policy review) that only yields 7.2% growth over five years. This would mean around £100 billion lower GDP by 2014-15 and around £40 billion less in tax revenues.
It would be wise to run the UK public sector on the assumption that growth has been impaired by the excesses of the 2004-7 period and by the broken banking system. It is easy to spend more if you are too pessimistic, but much more difficult to spend less if you are too optimstic.
The government is now looking at ways of accelerating growth. Tomorrow I will look at their list for consideration – small tax reductions or holidays for new businesses, deregulation, and more capital spending. Some of these ideas are helpful, but they will not b e on the scale needed. The new banks idea is capable of making a difference, as it addresses the shortage of cash for demand and investment in the private sector which lies behind the slow growth we currently see.
If they create 3 new banks raising £5 billion of new capital each, they could lend say 5% of GDP over a period, as the banking multipliers worked through the economy, allowing for more modest multiples in a tougher regulatory environment.