Last Wednesday, amidst the worst economic crisis since the Great Depression, the British Chancellor of the Exchequer Alistair Darling stood up in the House of Commons and announced the the UK’s budget for 2009. If the reactions of his fellow MPs are to be believed, it was a bit like watching a horror film; albeit one where the crazed axe murderer has been replaced with a boring Scotsman reading out numbers. The ranks of Labour sat in stunned silence, while the Conservatives reacted with a series of theatrical shocked gasps that accompanied the announcement of each new gruesome piece of economic news. Meanwhile the media, who had known most of what was in the budget days in advance, had a lot of fun being shocked all over again by the poor state of the government’s finances and the woeful growth predictions for the UK.
Thanks to the current economic maelstrom, this budget was arguably like no other in living memory. It was certainly like no other in recent living memory. The usual budget questions – “how much do I have to pay for my cigs and beer now?” and “why did my national insurance just go up?” – are out and a new set of much more, uh, exciting questions are in: “Is Britain going to default on its debt” “now their taxes have gone up, will those rich city bastards find some new ways to avoid paying them?” and “is that the average winter temperature in Iceland, or Britain’s growth estimate for this year?”
But what exactly was in the budget, what does it mean for Britain and can we make an incredibly complicated topic really simple in order to give the Chancellor a pointless high-school style grade? Find out over the fold!
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3 comments | tags: Economics, Recession, UK budget, UK Politics, UK Stimulus package
Britain’s Chancellor of the Exchequer Alistair Darling will present the UK’s budget on Wednesday. I think it’s fair to say that in the current depression-era climate this will be a fairly difficult task for Darling, akin to playing Scrabble in Aramaic or amputating a leg with a pair of scissors. As if his problems weren’t bad enough, his challenge is compounded, as we shall see, by the fact that he’s well and truly stuck between a rock and a hard place.
On the one hand, the latest figures on growth make alarming reading. Despite Darling’s predictions in last November’s pre-budget report of a contraction of Gross Domestic Product this year of 1%, the Bank of England now forecasts contraction of 3-4%. Given that private investment has all but seized up, this means that the case is extremely strong for a significantly large fiscal stimulus – a Keynesian style government spending spree aimed at creating thousands of new jobs and bringing the economy back to life. That’s the rock.
However, along with the latest figures on growth come equally depressing figures on government borrowing. Over the next two years the government is set to borrow around £170 billion, or around 12% of GDP. The Institute of Fiscal Studies thinks that government debt could be a whopping 82% of GDP by 2015, or about the same amount of debt as your average teenager with a credit card. That’s the hard place. And it’s really, really hard.
So the Chancellor is caught between the need for a stimulus and the need to avoid adding to the current levels of government borrowing. Now, many economists would argue that the need for a significant stimulus is more important than the risk of growing government debt. After all, if you don’t get the economy growing again then public borrowing will increase anyway. This argument is fairly sound, especially when you consider that when compared to other major countries Britain’s current debt level isn’t quite as scary as many like to claim (while ours is 48% of GDP, Germany’s is 65% and Japan’s is a stunning 170% of GDP, which is approaching two teenagers with a credit card). In fairness, however, it’s worth pointing out that Britain can’t afford to do the massive, pile-on-the-deficits stimulus package of the United States, who are able to sell endless amounts of their debt to China.
Indeed, Britain’s problem is this: in order to sustain its borrowing levels, it needs investors to keep buying government debt. If borrowing gets too high – or to be more accurate, if it appears to investors that it might get too high, then those same investors get scared and stop buying the government’s debt, which then has the knock on effect of raising the interest rate (or yield) which has to be paid on the debt it’s already sold. So the government ends up paying more for their debt they have and unable to sell any more. Bummer.
As far as I can see, this leaves the Chancellor with three options, none of them safe and none of them pleasant:
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4 comments | tags: Economics, Recession, UK budget, UK Politics, UK Stimulus package
