Page last updated at 16:45 GMT, Wednesday, 22 April 2009 17:45 UK

Borrowing set to soar in slowdown

By Steve Schifferes
Economics reporter, BBC News

budget deficit

The UK government has forecast a sharp economic slowdown, saying the UK economy will shrink by 3.5% in 2009.

While this is in line with most independent forecasts, the chancellor is predicting 1.25% growth in 2010, above the 0.3% consensus.

The government's Budget predictions also pencil in an above-average growth rate of 3.5% in 2011.

Mr Darling blamed the world recession for the decline in UK growth, calling it the worst in post-war years.

The Budget projections look like a triumph of hope over experience
Andrew Smith, KPMG

"No country could insulate itself from the world downturn," the chancellor said.

However, the IMF in its latest economic forecast suggests that the UK economy will decline by 4.1% this year and 0.4% next year.

Mr Darling's more optimistic growth forecasts will help him reduce the estimates of the size of future Budget deficits.

Howard Archer, chief UK economist at IHS Global Insight, said: "We suspect 3.5% is far too optimistic for growth in 2011, especially given the very substantial fiscal tightening that will be required".


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And Andrew Smith, chief economist at KPMG, said that "the Budget projections look like a triumph of hope over experience".

"If the chancellor's growth forecasts again prove over-optimistic, the public finances will turn out even worse."

Historic mistakes

The chancellor warned that the world should not make the mistakes of the 1930s and cut spending in the midst of the recession.

The chancellor's Budget forecast

"There are no quick fixes, there is no overnight solution," he said

He predicted that borrowing would reach more than 12% of GDP, or £175bn, in the next financial year and stay at the same level in 2010-11.

He said the deficit would begin to move to balance slowly, and then start falling to 5.5% of GDP by 2013-14.

But total government debt would continue to build up for longer, with the debt rising from 59% of GDP to 79% by 2013-14.

The key question for this Budget was whether it set out a credible and rigorous path for restoring the public finances to health

He predicted that it would not be until 2017-18 - in the next but one Parliament - that the share of debt would begin to fall again.

But Richard Lambert, the boss of the CBI, said that the government had not put forward a credible plan to reduce future deficits.

"The key question for this Budget was whether it set out a credible and rigorous path for restoring the public finances to health. The CBI's preliminary judgement must be that it does not," he said.

And Roger Bootle, senior economic adviser to Deloitte, said that "the startling thing, though, is that, huge though the borrowing figures are, they are still likely to prove to be too low".

He is predicting a deficit of at least £230bn next year.

The chancellor pointed to higher borrowing in the United States, of about 13% of GDP, using estimates by the Congressional Budget Office which include the full $700bn cost of financial bail-out - and are disputed by the Obama administration.

The IMF, however, predicts that the UK deficit of 12% in 2010 will be the biggest among the G20 countries.

Much of the difference in these calculations depends on how much the bank bail-outs will eventually cost the UK government.

The chancellor has said that he will cost those bail-outs at 3.5% of GDP, or £52bn, which is less than half what the IMF has estimated.

Squeezing the rich

The government has gained headlines by saying it will raise the rates of tax on the rich, with tax rates going up to 50% for the highest earners.

But in fact the taxes on the rich, even on the government's own estimates, will only raise £1.8bn a year, and only kick in after the next election.

This is about the same amount as will be raised by higher fuel duties. In total, higher taxes are expected to raise some £5bn by 2011.

The Institute of Fiscal Studies (IFS) is sceptical that taxing high earners will raise that much money, as there are many ways they could avoid such taxes.

The real tightening in future Budgets will come from an even greater squeeze on public spending.

The chancellor has said that the growth of public spending will be limited to 0.7% for up the three years after 2011, a bigger squeeze than occurred during the Thatcher years.

If government debt continues to rise, and more money needs to be spent on benefits, this will further squeeze spending in individual departments like health and education.

The IFS is also forecasting that government debt will not fall without further long-term restraints on public spending, or further tax rises

Long term debt

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