The Pre-Budget Report was, like the Queen’s Speech that preceded it in November, an almost empty sideshow.
The Pre-Budget Report was, like the Queen’s Speech that preceded it in November, an almost empty sideshow. The Chancellor’s threatened assault on bankers’ bonuses and Gordon Brown’s sudden diatribe against high public-sector salaries were feeble attempts to distract the public gallery by playing to its prejudices. Additional ‘efficiency savings’ were piffling in scale. All these gestures combined to emphasise the bare truth: that there is nothing for this dysfunctional government to do in its dying months aside from complete the ‘scorched earth’ policy by vandalising the public finances.
It may have been Alistair Darling delivering a Pre-Budget Report, but there was no doubt that this was a Brown budget in full, devastating form. It was used as a weapon of party political warfare. Rising public debt does not impinge immediately on voters’ lives in the way that tax rises or public service cuts do, so the scale of this catastrophe has not yet come into focus — and that’s why Gordon Brown has let rip. The situation is so extreme, with Whitehall now borrowing more than £1 for every £5 it spends, that no incoming government, however radical, could hope to turn the public finances around within a single parliament.
To understand the scale of the damage that Mr Brown is doing, consider this. Already the national debt is £830 billion — the Pre-Budget Report said it will hit a staggering £1.5 trillion by 2014/15. After that point the Institute of Fiscal Studies, the closest we have to a post-Budget lie detector, takes up the story. It estimates that even with an aggressive attempt to cut spending the debt will hit £1.8 trillion in 2032 and then decline slowly hitting £1.6 trillion in 2040/41. And if these figures sound abstract, like a fiscal fantasy, let us put it into perspective.
This year, and every year for at least the next decade, Britain will pay more in debt interest than on educating our children or defending the realm. Every penny servicing this debt, this toxic legacy of this incompetent Prime Minister, is a penny that could be otherwise put to use creating jobs in the economy. On the Budget’s figures, a child born today in Britain will already owe £13,500 — and will have salary confiscated through the tax system to pay this debt.
It is true that this recession is global, but the British public have been hit the hardest. All nations are running deficits — and most will do so next year and the year after. Over this period, according to the European Commission’s forecasts, the people of Italy will have to shoulder a national debt which will increase by £1,400 per person. In Germany, it will be £2,200. In France, £3,300 per person. All of this is deplorable. But in Britain the increase in debt will be £5,500 per person. No other European government intends to impose a greater burden on their people.
As Irwin Stelzer argues on page 14, there is a limit to how much the world will lend Britain given that there was nothing in the 212 pages of the Pre-Budget Report to suggest a repayment schedule. Moody’s, the debt rating agency, put it politely when it said on Tuesday that Britain is ‘testing the limits’ of its AAA rating. If that goes, the cost of borrowing rises — as our zombie banks find it even harder to raise money. There is a real risk that Britain’s Japanese-style refusal to fix the banks leaves us exposed to a Japanese-style lost decade. The recovery might never properly arrive.
Are their any antidotes to this poison afflicting the national finances? Inflation, eroding the scale of the debt but at the same time eroding personal savings, destabilising the commercial economy and fuelling wage spirals, is the most dangerous of them. Yet this spectre may well return to Britain, given that we have the highest inflation in Europe. With the Bank of England printing the equivalent of £1 billion a day, little wonder the value of our currency is falling.
A return to normal economic growth, on the other hand, is clearly desirable — and it will be a brave chancellor who judges the moment ripe to cut taxes rather than raise them, in order to maximise growth prospects and thereby boost overall tax revenues. But such bravery will be required. As the Centre for Policy Studies powerfully argued this week, cutting corporation tax to 20 per cent would be a much-needed spur to growth. Germany, planning E24 billion of tax cuts in hope of increasing revenue, is showing this imagination.
But the major remedial action will simply have to be made on the spending side of the ledger, and no policy or principle declared so far by David Cameron’s Conservatives comes anywhere close to the scale of adjustment required. A mere £7 billion of savings were sketched in at their party conference; even the boldest think-tanks have so far only come up with suggestions for £50 billion; but the International Monetary Fund has estimated that £150 billion is more like it.
It will be no surprise if UK public debt has been downgraded by the election; if so, a gilt buyers’ strike will become more than a theoretical possibility. The new government will face a Sisyphian financial task, so formidable as to make almost every other issue of the day look trivial. And Gordon Brown, we predict, will leave office refusing to the last to admit the appalling damage he has done: this monstrous debt, a blight on generations to come, his one and only legacy.
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