Tuesday, 25 November 2008

The pre-budget report.

Today Alistair Darling stood up in the House of Commons and gave what is widely seen as being the most important budget announcement for a generation. Except, of course, it was not a budget; it was a pre-budget report. In reality this distinction was moot, and in all but name it was a budget.

Others have written about the effects of the various measures; the reduction in VAT from 17.5% tp 15%, or the new 45% tax rate on earnings over £150,000 (to be imposed from 2011). Instead, I will concentrate on some other things that piqued my interest about the announcements.

The BBC has some interesting graphs at http://news.bbc.co.uk/1/hi/business/7734971.stm. The top one is particularly interesting; from figures released today, the projected recession and subsequent recovery appears to mirror that of the 1990-1993 recession, with only one year spent in negative growth, and a recovery in 2010. Is this a coincidence? Unfortunately, Alistair Darling appears to be the only one who believes that the recession will only last for a short period.

Let's take a look at the other recessions shown in that graph. The one of the early '80s has been blamed on Thatcher. Whilst it did happen on her watch, it started right at the beginning of her premiership, and was rooted well within the policies of the previous Labour Government. It often takes two or three years for the effects of economic policies to become clear. In the same way, the current woes are based on decisions taken (or not taken) several years ago.

As another example, in his autobiography (p.106) John Major blames the recession of the early 1990s on inaccurate growth forecasts made by the treasury (when he was Chief Secretary to the Treasury) in the 1987-1988 period. The treasury underestimated growth, which meant that for a couple of years growth accelerated, and interest rates (*) had to be increased to cope with it. Now we are in the opposite situation, with the treasury appearing to massively overestimate growth.

The second graph is also telling; the increase in the budget deficit over the estimates made just eight months ago. This was a real 'wtf!' graph for me. (I also wonder how much PFI is included within this - some people claim that the Government has been nudging the magic 40% barrier for some time if you include all the off-books debt). Has the situation really deteriorated fast enough to cause the projections to be that far off?

I really cannot see anything other than some serious tax rises in future years, whichever Government may be in power. I can only hope that the situation does not deteriorate further.

(*) There were other things that they could have done, but this was seen as being the quickest and most politically acceptable thing to do; putting up taxes would also have worked, but may have taken longer to trickle though and been political dynamite.

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