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This much borrowing will be very painful
Ruth Lea, Economic adviser at the Arbuthnot Banking Group29.10.08
THE Chancellor, Alistair Darling, has an opportunity at tonight's Mais lecture to make a complete break from his predecessor's fiscal sleights of hand. He should seize it but not simply to scrap Gordon Brown's "golden rule" on public finances in favour of unrestrained borrowing.
The markets were, in any case, tired of Brown's manipulation of his "rules" and his persistently over-optimistic forecasts of the public finances. But then, earlier this week, Mr Brown claimed that increased borrowing in the short-term was the most "responsible" way of helping the economy.
When I heard that, I almost choked. Here was the man who had inherited an economic "golden legacy" from the outgoing Conservative government in 1997, including public finances undoubtedly heading into the black and who subsequently and comprehensively undermined the public finances through his own profligacy. It took chutzpah.
As the economy slips into recession, we now see the extent of Brown's damage to the public finances. Public borrowing may be as high as £65billion this financial year (compared with the Budget forecast of £43 billion) and up to £100billion next year (compared with a forecast of £38billion). These figures represent around 4.5 per cent and 6.5 per cent of GDP respectively. Given the likely sluggish growth in 2010, it is unlikely public sector borrowing will improve much in that year. Indeed it will probably deteriorate further. But even if the Budget forecasts were to be realised, the borrowing data would still be shameful after 16 years of continuous growth indicative of a significant structural budget deficit that needed to be addressed.
Suffice to say, all this borrowing needs to be financed. With overseas investors apparently responsible for around three-quarters of gilts purchased in recent years, it is only to be hoped that they continue to regard British government debt as a safe investment in these days of the falling pound. Thus, along with all his other headaches, Mr Darling is surely aware that he must develop a credible borrowing reduction programme out of the ashes of Gordon Brown's discarded fiscal rules if he is to retain the confidence of investors. When and if any future Government grasps the nettle of the necessary borrowing reduction programme it will be very unpleasant for the taxpayer unless public spending is reined back.
In the early Nineties borrowing exploded, reflecting the recession, and in March 1993 Chancellor Norman Lamont announced a package of £17billion in extra taxes. It was the right course of action and the public finances recovered. But it was painful and unpopular.
In the late Seventies I was working on the public borrowing figures in the Treasury, following the International Monetary Fund's bail-out of Britain in 1976. It was a grim job in grim times. I am sure the Chancellor and the Prime Minister, to name but two, want to avoid this humiliation again.
