Darling’s 50 Minutes

ALISTAIR DARLING SURPRISED MANY by choosing to present an optimistic view of the UK economy in this afternoon’s budget. Despite the fact that he expected it to shrink by 3.5% in 2009 (its worst performance since 1945), he predicted growth would return later this year; reach 1.25% in 2010; and grow to 3.5% in 2011. His assumptions enable him to say that the government’s predicted long term trend of 2.75% growth remains unchanged.

This time last year, Mr Darling predicted public borrowing of £43 billion; but it actually turned out to be £90 billion (over twice his estimate). Similarly, he had projected borrowing of £38 billion for this year; but has been forced to revise his estimate to £175 billion.

More worrying is the Red Book figure for guilts that the government intends to sell this year to raise funds. Just three weeks ago, that figure stood at £150 billion; but it has been revised to £220 billion in this budget — more than the amount that is currently outstanding today.

Government debt, from a preferred level of 40% of GDP, rose to 57% last year and is now projected at 79% for 2009. The danger is that such leveraging will result in the UK’s triple-A credit rating being downgraded, and for the costs of debt to rise appreciably. Moreover, if the UK’s credit rating is downgraded, it may prove impossible for the government to sell the quantity of guilts it needs to raise the necessary funds.

As Mr Darling sat down, the IMF predicted that the UK economy will decline by 4.1% this year and 0.4% next year — far worse than his own announcements.

The chancellor predicted that the Consumer Price Index (the government’s preferred measure of inflation) will fall to 1% by the end of the year; but that capital investment would continue at historically high levels until 2012. However, when you look at the figures, it is clear that he is actually squeezing public spending by saying it will grow only by 0.7% per year from 2011 — a lower rate than when Mrs Thatcher was in power. There is also a provision of £3 billion in efficiency savings expected in the area of Health and Education, which, in effect, is a real-time cut.

Mr Darling expected the public finances to be back in balance by 2018.

Key points of his speech were as follows:-

Alcohol, tobacco and fuel

  • Alcohol taxes will go up by 2% from midnight. This is likely to put 1p on an average pint of beer.
  • Tax on tobacco will go up by 2% from 6pm (around 7p per packet).
  • Fuel duty will rise by 2p per litre from September. The fuel escalator will then return to put another 1p on the cost of a litre, above indexation, each April for the next four years.

Benefits

  • Child tax credit to rise by £20 by 2010.
  • Child trust funds for disabled children to rise by £100 a year, £200 a year for severely disabled children.

Car scrappage scheme

  • From next month, until March 2010, motorists will be able to obtain a £2,000 discount on new cars — if they trade in their old banger that is more than 10 years old. (They must be the registered keeper of the car and have had it for at least twelve months).

Environment

  • Britain commits to cut carbon emissions by 34% by 2020.
  • An extra £1bn to help combat climate change by supporting low-carbon industries.
  • £525m for offshore wind projects over the next two years.
  • £435m support for energy efficiency schemes for homes, firms and public buildings.
  • £405m to encourage low-carbon energy and advanced green manufacturing.

Government savings

  • Tax loopholes and schemes identified which could provide £1bn of extra revenue over the next three years if closed.
  • An extra £9bn in efficiency savings is planned.
  • Public spending to be cut from 1.1% next year to 0.7% in 2011-2012.

Help for business

  • Help for loss-making companies extended. They will be able to reclaim more taxes paid in the last three years until November 2010.
  • Businesses’ main capital allowance rate doubled to 40%.
  • New £750m strategic investment fund to help emerging technologies and regionally important sectors.

Housing

  • Scheme to guarantee mortgage backed securities to boost lending.
  • Stamp duty holiday for homes up to £175,000 to be extended to end of year.
  • Extra £80m for shared equity mortgage scheme.
  • £500m to kickstart stalled housing projects —including £100m for local authorities to build energy efficient homes.
  • £50m to upgrade housing for the armed forces.

Jobs and training

  • Government support for economy to protect 500,000 jobs.
  • All long-term unemployed under 25s to be offered job or training.
  • £1.7bn additional resources for Job Centre network.
  • £250m funding to help people get work experience in growth industries.
  • Funding to create 54,000 new places in sixth form education.

Pensioners

  • Grandparents of working age who care for their grandchildren will see that work count towards their entitlement for the basic state pension.
  • Winter fuel allowance to be maintained at higher level (£250 for over 60s and £400 for over-80s) for another year.
  • The basic state pension will be increased by at least 2.5%, regardless of inflation.
  • Savings limit increased from £6,000 to £10,000 (before being taken into consideration for benefits).

Savings

  • Annual limit for tax-free ISAs to rise to £10,200 for over-50s this year and for everyone else next year. (The cash ISA limit rises to £5,100).

Tax

  • Income tax for those earning more than £150,000 a year (currently 45%) will rise to 50% from April 2010, and those earning over £113,000 will lose the personal tax allowance.
  • Tax relief on pensions will be reduced for people earning more than £150,000 a year from April 2011.

… (24/04/2009) – Chancellor’s Forecasts Undermined By Latest GDP Figures

… (21/05/2009) – Britain’s AAA Rating Under Threat

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  1. […] is difficult to see how the chancellor can justify his budget prediction of a 3.5% decline in GDP this year, or his assumption of a return to growth in its last […]

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