BBC NEWS Americas Africa Europe Middle East South Asia Asia Pacific

BBC News World Edition
 You are in: Talking Point  
News Front Page
Middle East
South Asia
Talking Point
Country Profiles
In Depth
BBC Sport
BBC Weather
Thursday, 28 November, 2002, 11:36 GMT
Six Forum: What does the pre-Budget report mean for you?

  Click here to watch the forum.  

  • Click here to read the transcript

    Chancellor Gordon Brown has signalled a big rise in government borrowing as he told MPs he was downgrading his hopes for UK economic growth.

    Delivering his pre-Budget report, he said borrowing would rise to 20bn in 2002/03 against a forecast of 11bn.

    And he said he expected growth of 1.6% this year, compared with his forecast in April of between 2% and 2.5%.

    It is the first time that Mr Brown has admitted that he got his sums wrong over growth.

    The chancellor also delivered a tough message to firefighters and other workers demanding pay rises.

    With inflation at 2% the government could not yield to "inflationary and unjustified pay settlements," he said.

    Has the Chancellor got it right? What do the changes announced in the pre-budget report mean for you?

    The BBC's economics editor Evan Davis answered your questions in a LIVE forum for the Six O'clock news, presented by Manisha Tank.


    Manisha Tank:

    Welcome to the Six Forum with me, Manisha Tank. Counting the pennies - that's what Chancellor Gordon Brown's been doing. His pre-budget report is out and it seems Treasury coffers are being eaten away as the world economic downturn fails to show any let up. Borrowing it seems is also set to increase now that the Chancellor has downgraded his estimates on growth for the UK economy.

    Well, it certainly isn't the most encouraging backdrop for the striking firefighters and public sector workers, including teachers, who were hoping for pay rises at this time. So what does all the fine detail mean?

    Joining me to address your questions, the BBC's economics editor, Evan Davis. Many people will want to know what all of the technicalities of a pre-budget report are really about. Angela Booth e-mailed in from Lanarkshire asking: What does it mean when the Government borrows billions of pounds? Is this paid for by extra taxes?

    Evan Davis:

    Well what happens is, the Government says - we'll sell some IOUs - we'll hand out some IOUs to people - they're called gilts in the technical world - people who want to save money, pension funds and places we put our savings - they take these IOUs. So the Government's got cash and these institutions or individuals, they have these IOUs.

    Now of course it doesn't mean extra tax now but down the road it does mean extra tax because at some stage you have to pay this money back which is the nasty bit, if you like, of extra government borrowing. And of course the Chancellor pays interest on that money as well. So he adds to his bills by borrowing more.

    But I think fortunately for Gordon Brown, he's not borrowing so much at the moment that he has to worry too much about that. But essentially savers in Britain - even some savers overseas - they lend the money to the Chancellor, he spends it and he pays it back later. Just like you or I going to bank and borrowing some money.

    Manisha Tank:

    Many of you were wondering why the National Debt has got to the position that it has and you know there was a time not so long ago where we were talking about Treasury coffers bulging over and having plenty to spend. Ken Jay e-mailed in from Warwickshire: Does it matter if the National Debt is so high and do you think the new debt makes euro entry actually less likely in the next couple of years?

    Evan Davis:

    I don't think we have to worry too much because although the Chancellor's borrowing quite a lot this year and he's going to borrow quite lot next year - so he's borrowing a lot. The overall stock - the amount that he's actually borrowed, his overdraft if you like - is not too serious. So he doesn't have to worry that he's going to be borrowing for a few years as long as the actual total amount of debts don't get out of hand.

    So I don't in a sense think he's got too much to worry about and that's precisely because over the last few years the Chancellor didn't borrow money, he paid down the debt - he was paying it back. So he got it from quite a high debt to a much lower debt and now he's letting it go up again. It's like the Grand Old Duke of York - they trim the debt down and now it's going back up a bit.

    Now what are the implications for euro entry - I don't think there is one. One of the rules about the euro is you can't borrow too much and you can't have too big a National Debt, so Gordon Brown is well within those rules. So his options are open still - no one's going to say to him you can't join because you're borrowing too much or your debts too big - he doesn't have to worry on that count. I think the decision about whether we join the euro will be whether Gordon Brown and Tony Blair want us to join rather than whether we meet the rules. I don't think all this borrowing has any effect there.

    Manisha Tank:

    Just sticking with the finer points of the borrowing issue. There seems to be a bit of a misunderstanding out there. Many want to know where exactly Chancellor Brown is getting his IOUs, as were - where he is borrowing the money from and how it works. Brandon sent us an e-mail asking: Where does the Chancellor intend to borrow all this money from exactly?

    Evan Davis:

    It's a very good question. Just imagine a simple world where you've got some people out there saving - putting money in, say, to their pension - that's saving, the pension fund is sitting on a big pile of cash and says, what shall we do with this. The pension fund may say, let's lend some money to the British Government - it's that simple. So they lend the money to the British Government, the pension fund then gets its interest - which is what it what it wants all and it pays it to its pensioners and the Chancellor and the Government have the money they want. So it really is quite simple.

    And the way the Government does it is it just prints a load of bits of paper - they're called gilts because they used to have a gold edge around them, so they were called gilt-edged securities - they print them and the sell them. Although it sounds like too good to be true - all the Chancellor does is prints some paper and sell it - we'd all love to be able to just print IOUs and sell them. Of course the Chancellor does have to pay it back. Fortunately for savers in Britain, the Government has a pretty record of paying its debts back. So I think you can expect that he will pay it back.

    So think of borrowing not as avoiding taxation - think of it as postponing taxation - it's postponing the pain. It's about buying now and paying later - that's what it's really about.

    Manisha Tank:

    Cherry Kay, Wiltshire asks: In the light of Mr Brown's potential borrowing what effects will it have on the Bank of England's base rate? Could the mortgage market turn and borrowers be left in a similar situation to that of the late 80s, early 90s?

    Evan Davis:

    When the Government borrows money and it spends money that it hasn't raised through taxation, it does tend to have a slightly inflationary impact because it more money being circulated round the economy, injected around, spent - it is a little bit inflationary. If inflation goes up then the Bank of England will say, we'll we should put interest rates up because we have to slow the economy down.

    So what would happen is if Gordon Brown borrowed a ton of money and stimulated the economy, what the Bank of England would want to do would be to raise its interest rates to stop us spending as much and in a sense what would be happening is Gordon Brown would be doing more spending and the rest of us would be doing less spending and the economy would carry on. So that's the way it works. If Gordon Brown borrowed a ton of money, probably the Bank of England would want to stop us spending as much money and us borrowing as much money - there is a link.

    But fortunately at the moment, the economy is not overheating terribly, there isn't a huge inflation problem and Gordon Brown's borrowing is not yet catastrophic. So I don't think the Bank of England will feel it has to respond terribly strongly to what Gordon Brown is doing. If however he had to borrow a great deal more than he says he is borrowing, then I think the Bank of England would act.

    But what the Bank of England is always trying to do is to maintain a juggling act - if Gordon Brown is increasing his spending without raising taxes then the Bank of England wants to stop us spending a bit so the economy doesn't have too much overspending overall. But I don't think that will be their problem for the time being.

    Manisha Tank:

    Let's get on to the other hot topic of the day, which is obviously public services and wage demands. It's quite interesting that Gordon Brown said to the effect, with inflation at 2%, the Government could not yield to inflationary unjustified pay settlements - indicating the problem with the 40% demand from the firefighters, obviously a very important issue right now. Mike in London e-mailed in asking about raising taxes perhaps on high earners as being an answer to this. Is that the answer, is that something Gordon Brown's talked about?

    Evan Davis:

    That's the political choice Mike. If the Government wanted to, it could raise taxes on the likes of me and you and it could say, we're raising the amount you give me and I'm giving it to the firefighters. That would be of no consequence to inflation, it would be of no consequence to borrowing, it wouldn't upset the plans. It's a perfectly possible choice - but it's not the choice the Government want to make. And I'll tell you why they don't want to make that choice right now - it's that they've already announced tax rises - they're coming in next year and I think Gordon Brown is thinking, goodness, that has got to do because it's painful enough raising the extra taxes we've got next year, so the last thing I want to be doing is raising other taxes.

    But Mike is absolutely right, that if Gordon Brown raised taxes to pay the firefighters, then it wouldn't be particularly inflationary because the firefighters would be richer, we would be a bit poorer and that would, if you like, all balance out. It wouldn't be that the economy would be heating up.

    There's just one other factor of course which is on Gordon Brown's mind which is if you paid the firefighters more then a lot of other people start saying they want more if everybody in the private sector said we want 16% or we want even more than that, then you do have inflationary consequences. I don't actually see that happening. But the essence of it is, if you wanted to raise taxes and pay them, you could - it's a political choice and the Government have clearly made the political choice they have.

    Manisha Tank:

    Steve, Manchester asks: Much of the pressure the Government are under on public sector pay seems to be driven by the cost of living in London and in the South East. Shouldn't Gordon Brown be doing something to reduce the ridiculous centralisation of our economy?

    Evan Davis:

    Actually, I couldn't agree more. The problem of course is what do you do about it, but I couldn't agree more. Really the problem is fundamentally that too many people are squashing into the South East. There's been something of a net migration down here. There's not a huge amount of land that people want to build new houses on so of course the cost of living in London becomes very expensive. And everything would work out much better if the country spread itself out a bit more and stopped congregating in the South East.

    But it's not altogether Gordon Brown's actions that have created this situation - of course a lot of it is private sector companies congregating down in the South East. And I'm not absolutely sure what he could do about it. One solution to the problem of the congested South East and higher prices, is let the high prices do the job for him. What happens is, if London and South East become hideously expensive - as I think it has done - a lot of sensible business people will say, why go down south, what a horrible place to go - it costs twice as much as being up North or in Scotland or in Wales - there are so many places you can go that are wonderful places to do business and you don't need to pay all those high prices.

    In fact at the CBI conference I was at earlier this week, the North West Development Agency launched a campaign called Capital Punishment which was basically saying - it was a mocking campaign saying - who wants to put a business in the South East, it's so expensive there you might as well put it somewhere else and save a lot of money.

    Manisha Tank:

    Neil e-mails in from Kent: What evidence is there to suggest that the UK economy has avoided a bust in the last three years and not just enjoyed an extended boom?

    Evan Davis:

    Ah Neil, a man of my own heart - very, very good question. One theory is, is that the economy has been fairly stable and it will continue fairly stably and that's more or less the Gordon Brown thesis - we've had it today in his pre-budget report. Sure it's a bit lopsided - we've had bit doing well and another bit doing badly but it will all come right in the end.

    Another theory - let's call this the Neil theory, which I would attach a 20% - 25% probability to - is that the economy hasn't been stable at all, we've had a huge boom over the last few years and it has been paid for by foreigners lending money to us and the sign that that's going on is that actually we've got this terrible trade deficit - we're importing much more than we're exporting. Now that look great, everything looks wonderful because everyone feels very rich while we're importing more than we're exporting - everyone thinks, look I can buy cars cheap, I can buy this or that and the Pound is very high and keeps inflation low.

    But ultimately, we can't go on importing more than we're exporting and when that day of reckoning comes and we have to balance the national accounts, it might be rather painful and we'll discover that we were never as rich as we thought. And that is, I think, one of the nightmare scenarios that Gordon Brown obviously has to have in the back of his head. I think it's more likelier still that the economy will pan out alright. But I think we have to be very ready to say that actually we've had a rather over-extended boom - we've had too much consumption and too much of a trade deficit that has made the economy look much better, made us feel richer than we really are.

    Manisha Tank:

    And indeed Chancellor Brown downgraded the investments for the economy. Now we've been running an online vote - the question being: Has Gordon Brown been over-optimistic - and while we've been talking we've basically been getting our viewers to tell us whether they're impressed with the Chancellor's performance and 86% of you are saying that he is doing a good job. Evan, do you think that's a fair assessment?

    Evan Davis:

    Yes, I think you get some right if you're a Chancellor, you get the odd one wrong. OK you've got the odd year wrong - 2002, he's going to say, a bit of a downer on that one. But I don't think he's to blame for the problems the economy's had. I do think he led our expectations too high. He told he was being very, very cautious and I think we came to believe that he would never get it wrong - that he'd never had to downgrade his forecast and he has had to. So in that sense, he's got it wrong but I don't think you can blame Gordon Brown for the falling stock market, for the house price bubble, for the lopsided state of our economy - I don't think you can blame him for any of that, it's not really his doing.

    One thing I always say is, never overstate the power of politicians - they can do their best, they can pull this lever and they pull that and they can make a bit of a difference to an economy. But one thing they can't do is work miracles. Gordon Brown is not going to be the man who determines whether our economy is successful or not, that's down to the likes of you and I.

    Manisha Tank:

    I wonder whether we're verging on saying, we've got an honest politician there. Evan Davis, our economics editor, thanks very much for being with us.

  • Key stories

    Personal finance





    Links to more Talking Point stories are at the foot of the page.

    E-mail this story to a friend

    Links to more Talking Point stories

    © BBC ^^ Back to top

    News Front Page | Africa | Americas | Asia-Pacific | Europe | Middle East |
    South Asia | UK | Business | Entertainment | Science/Nature |
    Technology | Health | Talking Point | Country Profiles | In Depth |