Wednesday, December 09, 2009
First thoughts on the PBR - a holding operation
Posted by David Smith at 02:00 PM
Category: Thoughts and responses

In any budget or pre-budget report it is important to distinguish between what we already knew and what is genuine “news”. Until the weekend, it would have been news that the Treasury was planning a windfall tax on bankers’ bonuses but that got out. So the one bit of additional news was a 0.5% increase in National Insurance from April 2011, on top of the 0.5% rise already planned. This increase, like much else in the PBR, is tilted towards the higher paid by protecting those on low incomes.

Alistair Darling chose, no doubt for political reasons, to present this as the price necessary to pay for protecting “frontline” public services; hospitals, schools and the police. The markets would have liked him to sell it purely as the first down-payment in what will be a series of measures to get the budget deficit down.

The public spending numbers in the pre-budget report are tough; the 0.8% real increases in current spending from 2011 will turn into deep departmental cuts when debt interest and the costs of unemployment are taken into account. Public sector pay increases will be limited to 1% for two years from 2011 (which will create a fuss among the unions). Public sector workers - particularly the higher-paid - will eventually have to pay more for their pensions.

The language on public spending was not, however, tough. This was a chance for Darling to spell out, for the benefit of the markets and the public, just how much of a new era the economy is entering. He chose not to do so.

The macro numbers were unexciting. Quite why the Treasury bothered to revise up this year’s borrowing total from £175 billion to £178 billion is not clear, other than to demonstrate to outsiders that they have done the sums and concluded that not much has changed. That £178 billion is equivalent to 12.6% of GDP, because GDP is smaller than the Treasury expected (a 4.75% decline this year rather than the 3.5% predicted at the time of the budget).

Otherwise, it is more or less the same story as before. Borrowing edges down to £176 billion in 2010-11 (also up by £3 billion compared with the budget), then £140 billion, £117 billion and £96 billion. The last of these will represent 5.5% of GDP, thus meeting the aim, enshrined in the Fiscal Responsibility Bill, of halving the deficit over four years. Public sector net debt is seen rising to 77.7% of GDP by 2014-15.

Has the PBR taken us much further? There are some inevitable efficiency savings, coupled with some genuine savings from holding down public sector pay. But we are still more or less in the world we were before this. The Treasury is taking the fact the independent forecasters have moved into line with its 2010 growth forecast, 1.25%, as good reason to stick with its aggressive predictions for 2011 and 2012, both 3.5%. Officials will argue that even if these prove to be over-ambitious they have based their revenue projections on cautious assumptions.

Even so, we have moved full circle in the space of the past couple of weeks on this PBR. Everybody thought it would be a holding operation, then talk turned to something much bolder in the past few days. It was, after all, a holding operation, which does not change very much at all.