GAIN NOW, PAIN LATER! (From Business in Dorset)

GAIN NOW, PAIN LATER!

10:19am Monday 1st December 2008

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In his pre-Budget report Alistair Darling delivered economic downgrades bigger than any since the 1980s - the row of glum faces on the Government benches as he predicted misery for large swathes of the population said it all.

However many are questioning whether the government has been pessimistic enough.

In the wake of a “Boom” funded by debt and “Bust” looming on the horizon, the Chancellor unveiled a £20bn fiscal stimulus that will result in public borrowing hitting a record level of £118bn in 2009-10 and will fall to a level the government considers prudent only in 2015-16, far later than City forecasts had expected. Government debt will rise to a staggering 57 percent of National Income in 2012–13 when it will top the £1,000bn mark for the first time.

The Treasury assumes the fiscal stimulus, about 1 percent of national income for little over a year - will prevent the economy sinking by a further .5 percent. Mr Darling’s political gamble is that the fiscal boost will raise the morale of the public, while any pain will only be felt in tax rises, deferred until after the next election.

Speculation is rife about the real benefits of this stimulus (particularly to small businesses) that includes an overall drop in VAT from 17.5 percent to 15 percent, but an 8 per cent rise in duty on drink combined with an increase in tobacco and fuel tax - £2.5bn of additional capital expenditure projects brought forward from 2010-11, a £60 payment to every pensioner, an earlier increase in child benefit and a deferral in the planned increases in vehicle excise duties.

Another warning sign for the UK can be seen in the credit default swap market. These are instruments that insure bonds against default - the bond markets will ultimately decide if the suspension of the Governments strict fiscal rules, and replacement with this new fiscal stimulus, is credible or whether sterling will come under fresh pressure - initial concerns are reflected in the fact that Corporate bonds are easier to insure than Government bonds.

Even if the debt markets believe the Government is profligate, for households the message for the next decade is very grim. We can all look forward to a constant squeeze on public spending, persistent manipulation of taxes, with open and concealed increases, plus significantly higher unemployment.

Merry Christmas to you all.

Chris Slocock
BCC Business Representative for the South West
Vice Chairman SWCC Past President Dorset Business

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