Brown set to borrow more
21 Oct 08
Gordon Brown on Monday insisted the government would spend its way through the downturn, in spite of a slump in tax receipts and warnings that the Treasury’s fiscal rules will be smashed by record levels of borrowing
The Financial Times reports that borrowing hit £37.6 billion in the first half of the fiscal year, confirming that the public finances were crumbling even before Britain enters a likely recession and leaving the forecasts of Alistair Darling, chancellor, in tatters.
But the prime minister insisted the government would accelerate capital programmes to give a Keynesian boost to the economy, arguing that Britain’s finances were sound and able to withstand a bout of deficit spending.
Economists warned that the surge in borrowing would force a significant fiscal tightening in 2010-12 – a potential danger for the winner of the next general election and likely to put a brake on any recovery.
In the Commons, Mr Brown tried to put the best gloss on the deteriorating situation, saying Britain’s debt-to-gross domestic product ratio of 37.6 per cent was lower than main competitors – the eurozone average is 56.4 per cent – and could sustain higher borrowing. “It is because we cut the national debt over the past few years that we are able to do what is the right thing.”
But David Cameron, Conservative leader, said borrowing could hit record levels in nominal terms this year, posing a “£64 billion question” over Mr Brown’s stewardship of the economy.
Mr Darling will next month set out revised borrowing forecasts in his pre-Budget report, but his March prediction of £43 billion for the whole year now looks hopelessly optimistic.
The £37.6 billion half-year borrowing figure is the highest since the second world war in nominal terms, although relative to the size of the economy it is below that of the 1993/4 fiscal year, when John Major’s Tory government was fighting a recession.
In addition to higher outlays on social security and unexpected new tax credits, the budget is suffering from an acute shortfall in revenues even before the widely expected recession has bitten. Treasury estimates of growth in tax receipts are far short of those forecast at the start of the fiscal year, rising at only 1.9 per cent year-on-year instead of the 5 per cent rate that had been expected.
Mr Darling’s officials said the collapse of the housing market and slump in financial services were partly to blame for low revenues, with stamp duty receipts particularly badly affected.
The chancellor is expected to confirm in his pre-Budget statement that the government’s “sustainable investment” rule – that debt-to-GDP should be kept below 40 per cent – has been breached. The Northern Rock nationalisation had, in any event, pushed that ratio to 43.4 per cent, if the bank’s liabilities were taken into account.
Gemma Tetlow of the Institute for Fiscal Studies said even if bank rescues were stripped from spending calculations, the government ran a “50/50 chance” of breaking its fiscal rules this year and was very likely to do so next year.
Michael Saunders, economist at Citigroup, said lower-than-expected tax receipts came before the full impact of any recession kicked in, and revenues were likely to weaken.