As we learnt during the banking crisis, what Robert Peston predicts tends to become reality shortly afterwards. So, his informed speculation on what is in the PBR is well worth reading.
This passage is particularly interesting and appears to be the latest shot in the briefing wars, which has reached up to cabinet level, around the Brown-Darling fight over whether or not Labour should explain how it tax cuts and increased spending will be paid for:
“But he [Darling] will also announce deferred tax rises and deferred cuts in public spending – to kick in when the economy has recovered a bit. When would that be? Maybe 2010, maybe 2011.
If he fails to announce such debt-reduction measures, there could be very strong downward pressure on sterling and a corresponding damaging rise in the cost for the government of borrowing.
And, to be clear, the incremental sums he’ll announce he has to borrow over the next couple of years will be colossal – equivalent to at least 8% of GDP, possibly more, or well over £110bn per annum.
You have to go back to at least the 1970’s for a time when public borrowing was spiralling up at such an alarming rate.
Such a rise in public borrowing would be unsustainable.
Which is why, to repeat, there will have to be deferred tax rises and deferred public spending reductions inked into the public accounts and announced by the chancellor.
All of that is inevitable.
So which taxes will rise?
Well my prediction is VAT.
For the sake of transparency I should say that I don’t know that there will be a VAT rise.
But a deferred increase from 17.5% to 22.5% in the VAT rate would raise around £20bn.
And it’s one of the few future tax rises which might actually stimulate a bit of increased economic activity ahead of its implementation, rather than encouraging us to save
To use the economic cliche of the moment, it would give us all quite a “nudge” to spend now, before the swingeing increase in VAT would kick in.” I suspect that how the PBR is reported will turn on whether the specific measures needed to pay for the fiscal stimulus are announced or not. If Darling just makes a vague allusion to spending restraint and tax increases if necessary, then the cost of paying for this will remain abstract. While if Darling mention specific numbers, the reality of the situation will hit home.
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