THE best measure of the ordeal now in store for the Government came in a brutal set of figures last week. Not the latest signs of slowdown in the housing market, or the bleak Chambers of Commerce survey warning of unemployment climbing to two million, or even the figures showing economic growth has now come to a standstill after 62 quarters of expansion, though all of these will add to the sense of helpless fatalism within the Treasury.
What is set to 'do' for Gordon Brown and his coterie of advisers – 'Team GB' – already working on a recovery package for this autumn are the latest numbers on public finances.
In what is normally a 'good' month for tax receipts, the numbers for J
uly point to a deep deterioration in Government revenues and with that the near certain prospect of a sharp and steepening rise in the budget deficit.
The figures did indeed show a superficially comforting public sector net surplus of £4.8bn, but this was down from £6.4bn a year ago. And net borrowing so far this year at £19.1bn is more than double the figure at this stage last year. A £2bn tax revenue gain from higher oil prices is being more than absorbed by lower than expected tax receipts elsewhere – principally business tax.
The £43bn budget target for net borrowing for 2008-09 is now likely to be missed. Hetal Mehta, senior economic advisor at Ernst & Young, reckons Government borrowing this year could exceed £51bn. Neville Hill, economist at Credit Suisse, warns it could be more like £60bn.
Just to keep public borrowing within the Treasury limit of 40% of GDP next year would require, according to Grant Thornton, tax rises equivalent to 5p on income tax.
Dire though these estimates are, they pale before the projections being made for 2009-10 and beyond as the economy slows and tax receipts fall even further. Michael Sunders, economist at Citigroup, forecasts that the fiscal deficit will rise from £55bn this financial year to £71bn next and to a staggering £90.3bn in 2010-11.
The first immediate casualty of these estimates is the budget architecture for this year and beyond. Holding down the deficit to previously announced limits is key to investor confidence and especially to confidence in sterling. A falling pound adds mightily to the Bank of England's battle to bring down inflation.
All this strikes directly at the heart of Brown's premiership, for his claim to the top job came to rest on his reputation for 'prudence' and sound management of the public finances.
Of major concern is the block that a spiralling budget deficit now places on any "economic recovery plan" or "package of measures". The first escape route out of a deepening economic downturn – stimulus through interest rate cuts and a boost in Government spending and/or reductions in tax – is effectively blocked.
This is the dilemma facing Team GB, which comprises Ed Balls, the former Treasury Chief Secretary now in charge of schools; Wilf Stevenson, the former Smith Institute policy wonk, and Shriti Vadera, formerly Brown's economic policy adviser, now at the Department of Business, Enterprise and Regulatory Reform. The Treasury is rumoured to have been cut out of the loop on this project, feeding growing doubts as to how long Alistair Darling will remain in post as Chancellor.
Team GB now has to present a set of palliative and essentially political measures, financed by tax rises elsewhere, as a credible response to a deterioration sharper than any that the UK has had to face since 2001-02. The preamble to such a package will place heavy emphasis on the 'force majeure' circumstances now facing the economy: a credit crunch hurricane and soaring commodity price inflation which came from abroad.
However, such context setting, while valid and justifiable in the main, is unlikely to explain several uncomfortable features for Team GB: why interest rates are higher than those in America and Europe; why the decline in the economic growth rate is sharper, and why the deterioration in public finances has come about so rapidly. These speak to a prolonged domestic spending and borrowing bubble that has truly burst. So much for the resilience and strong underlying fundamentals claimed by the Chancellor. Indeed, the central claim of Brown's decade-long stewardship was not just that the economy had performed better than its EU counterparts but that growth had been put on a sustainable basis: "no more boom and bust". Really?
Likely autumn measures have already been well trailed. To help stimulate a deeply troubled housing market, there has been widespread speculation of a raising of the threshold for Stamp Duty or a Stamp Duty 'holiday' for first time buyers. There may also be the promise of extra help through the Bank of England to provide extra liquidity for mortgage lenders through a loan guarantee or 'kite marking' scheme.
To help ease the pain of soaring household energy bills there is likely to be an extension of the over-60s Winter Fuel Payment to all households claiming child benefit. And there will probably be extra support to business through complex enterprise grants and allowances. Such a package would need to be financed by tax rises elsewhere – possibly (according to unofficial leaks) by a windfall tax on the energy utilities.
But such a package, both in part and in whole, will be open to serious criticism. Such is the severity of the downturn in the housing market that it is unlikely that tinkering with Stamp Duty will have much effect. It does nothing to address the acute shortage of finance for mortgages, while many will question the wisdom of enticing first time buyers into a market where house prices are set to fall further. Better, surely, to allow house prices to continue their necessary correction. Guarantees of financial support for the banks to step up mortgage lending adds to an already unstable pile of contingent liabilities on the public finances (see Northern Rock).
Few will not welcome help with soaring fuel bills. But a broad brush measure to provide help to millions of child benefit claimants including middle-class families will be open to the accusation of being politically driven to help shore up support among floating or defecting voters.
Arguably most contentious of all would be a tax on the electricity generating companies just when other Government ministers are doing all they can to encourage these utilities to step up investment in generating capacity if we are to avoid the prospect of brown-outs in years ahead.
Overall, however, such a package is unlikely to have any significant impact on the key problem it seeks to address: the slide of the British economy into a serious and prolonged recession. There is little that gives any comfort to the opposition: the deficit on the public finances will place major constraints on any budget changes it may wish to make.
For Team GB the policy crisis is immediate. If it is not the end of the Brown premiership, it is the end of an era in which economic growth could be counted on to sustain the spending ambitions of Government. Indeed, given the likely fall in tax revenues and the rate of deterioration in the public finances, cuts in Government spending may soon be forced upon it. A moment of truth is now at hand.
