Wednesday, 22 April 2009

The Budget: First Impressions.

Well, first off, I'm not impressed.

According to the Figures given out by Alastair Darling today, we are in for a tough decade ahead. By his projections, Public Sector Debt is set to increase to 79 percent of GDP by 2013-14.

That by itself, is a harrowing statistic. But it gets better, I assure you. These figures are based on there being economic GROWTH next year! So borrowing continues to escalate thorugh 2010-11 as supposedly the economy grows and then starts a gentle decline towards 2013-14. But whats the figure after 2013-14? Does PSB decline, or as I suspect continue? Well yes, because later on in the budget report its says that it expects PSB to reach balance and start to decline "Once the global shocks have worked their way through the economy in full". The words and the government's own graph seem at odds: either borrowing declines after 2010 because of growth, or it declines after 2013 when the effects of the credit crunch are over. Which is it? I suspect the latter, because given the increased demand from unemployment benefit and the reduction in tax revenues we're looking at in 2009-10, I really doubt these figures.

Anyway, to sum up this section, we have figures based on wholly bogus growth data showing Net Debt to be 79% of GDP by 2013 and PSB to continue at high levels until 2018. In fact one of their own graphs (Chart 2.3) shows Net Debt to still be over 70% until 2019-20 and thats if their optimistic fianancial forecasts hold true! How long things draw out if the economy recovers as slowly as the pessimists predict or theres a significant reduction in GDP is well, anyone's guess. 15 years? 20 years?

The chances are good that it will be a whole lot worse, because there are several things which can throw a spanner in the works. Which I'll now come to:

The Chancellor's figures on inflation don't have any basis in reality. He has inflation at ludicruosly low levels, given that the pound has already slumped by 30% (and on todays news slumped almost another 2%). So as the Pound devalues against other currencies, our goods become more expensive. Petrol is already on the rise as are food prices, as I've already said elsewhere. Factor in the increased money supply, which deliberately devalues the Pound as well, the government will be lucky if inflation stays as low as their predictions over the next few years.

All the way through the budget document, the figures of net debt and borrowing are qualified that they include certain assumptions about unrealised losses. Whats the betting that these assuptions are wildly optimistic.

I really think that the chances are high we'll eventually be heading to the IMF, because if even the optimistic government figures show us heading for 80% of GDP in debt, whats the reality going to be; 90%, 100%? Given that we don't have any manufacturing base and therefore no way to pay the money back, I assume the IMF won't touch us with a bargepole. People have joked on various blogs that this is Zimbabwean politics in action. Its a joke no longer, its actually reality.

It may well be part of the plan to call in the IMF, because loans from them always come with requirements to reduce public spending. The warped minds in government probably think its better to do it this way so they can blame the IMF for the huge neccessary cuts in public sector spending, rather than accept blame themselves.

Now the other stuff.

The 50% tax rate for people earning over £100,000 is plain stupid. Its the politics of envy and just puts up a sign that the UK doesn't want high earners here.

Alcohol and fags get clobbered again, but thats to be expected, given that we're already in a 70's timewarp economically.

What wasn't expected was the fuel duty increase in September. Given that people are on their knees financially, the last thing they need is increased fuel costs.

The car scrappage scheme is very clever. Basically anyone taking up the offer (if they can get credit to pay for their new car) trades in their 10-year-old motor, for a brand spanking new one. Its very clever in that it gets people to trade older cars that are on the old capacity-related Vehicle Excise Duty, for a new vehicle on the CO2-Emissions-Related, more expensive VED. A nice touch from the government: they look as though they're helping out and they'll get their money back in increased VED over the life of the vehicle anyway. The downside is it's bad news for anyone with a secondhand car under 10 years, its just devalued by a significant amount.
To be honest I don't see that much of a take-up on this, because people tend to drive older cars here. Its worked in Germany as people tend to drive younger cars there because their tougher MOT rules weed out the older cars sooner.

Finally (because there is too much to criticise in the budget), one last point: The government has signalled that there will be at least 5 years of continuing borrowing. What's that going to do to the guilt bond markets? I can see their values depressed quite a bit, seeing as how they've pre-warned everyone there will be a steady stream of issues over the next few years. I wonder if the government, now its issued these plans will get its debt financed? I'd put money on saying no it won't. Then it'll be off to the IMF for a loan.

So many stumbling blocks, so many unquantifiables.

Basically, scary times ahead.

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