Chancellor juggling daunting numbers

Dec 8 2009 by Sarah Green, The Journal

WITH the Pre-Budget coming out tomorrow, business finds itself asking two questions.

The first is: will the Chancellor’s measures help to put the UK’s public finances on a pathway to stability over the medium term?

The second is: will those measures start to stimulate the economic growth needed to get people back into work and drive up government revenues?

The numbers are daunting.

The International Monetary Fund estimates that the UK’s fiscal deficit in 2010 will easily be the biggest in the G20, running at 13.2% of GDP.

On his present plans, the Chancellor will take his foot off the fiscal accelerator in 2010-11 and start to apply the brakes steadily harder until the budget is in balance by 2017-18. But he has a credibility problem.

For one thing, his forecasts are based on what look like optimistic expectations for economic growth from 2011 onwards. For another, they require eight years – getting on for two full parliaments – of increasing fiscal austerity. And there is little detail about how his goal would be achieved in the later years – not surprising, since they are such a long way off.

On this trajectory, the structural borrowing requirement – the hole that would be left to fill after a cyclical recovery – would still be as high as 4.5% of GDP in 2013-14. The Institute for Fiscal Studies suggests that government debt may not return to its pre-crisis levels until the early 2030s.

Of course, there are many uncertainties around these numbers, and the biggest of all concerns when the squeeze should get under way. Start too soon and there would be a risk of snuffing out a still fragile economic recovery. Leave it too late and the UK’s borrowing costs would start to escalate, building even bigger trouble for the future.

That is why the CBI believes that extra tightening should not start until 2011-12, but that the aim then should be to get the budget back into balance by 2015-16, which is a significantly greater squeeze than that proposed so far by the Chancellor.

To be credible, he will need to provide not only the spending totals, but also some indication of how and where such savings are to be achieved.

An essential part of the strategy must be a resurgence of economic growth, which would increase tax receipts, cut benefit payments and create new jobs in the private sector to compensate for losses in public employment.

Over the past ten years the economy has been supercharged by government and household consumption, both fuelled by debt, and by an expansion in the financial services. The best hope for growth now lies in net exports and a turnaround in business investment. The proposals on Wednesday will need to be tested against two further questions. Will they help to create jobs in the private sector? And will they make the UK a more attractive place for investment from around the world? Within the overall framework of fiscal austerity, the priority must be to invest in skills, innovation and decent infrastructure, to support trade and to retain a competitive labour market and taxation system.

At this stage in the political cycle, it is probably too much to ask the Chancellor to announce radical measures to put the public finances in order. But the least we can expect is that he does no harm and that he starts to shift policy in a direction that will create jobs and investment over the medium term.

Sarah Green is regional director of CBI North East