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Comment: The empty carrier bag Budget

Created:
12 March 2008
Written by:
Howard Wheeldon

Was this the gloomiest budget since 1993? Hardly. But as most changes about to hit the corporate sector or man in the street were announced a year ago by Gordon Brown, it was one of the most boring for years.

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Did it do anything to improve trust that Alistair Darling has got the economy in hand? With the simultaneous announcement from the Debt Management Office that its financing remit for 2008-09 will increase gilt supply to £80bn to cover Northern Rock, plus reasoned increases in the government borrowing requirement, the answer to that can only be no.

Sure, smaller measures that provide additional tax benefits for working pensioners such as winter fuel payments are welcome, even if those that drink, smoke or drive get clobbered. Even so, the vast majority of the speech gave the impression of yet another of those 10-year reviews of Labour performance that was only ever going to say "haven't we done well!" Thus, full marks for delivery but zero for content.

Wearing a Gordon Brown coat, this was a budget of substantial denial, as Darling wriggled his way through a sometimes noisy reception, barely mentioning Northern Rock as he argued that the sustainable investment on total government debt remains below 40 per cent of GDP. Meanwhile, the chancellor was quick to mention events in the global economy, but reiterating the 2 per cent inflation target suggests to us a clear lack of understanding of the depth of the current credit crisis. This is no time to be heading off further interest rate cuts!

Green issues apart, this budget was colourless to the extreme, largely crawling behind moves already announced by Gordon Brown last year, like abolishing the lower 10 per cent rate band of income tax and cutting the basic rate of income tax to 20 per cent. 'Non-doms' continue to get it in the neck with absolutely no additional concession, and there was to be no new attempt to stimulate business. But the real sting in the tail of this budget is the additional stealth taxes that creep in during 2009-10. Like father, like son, it seems Mr Darling is fully content to continue the long-time strategy of tax, spend, borrow and waste and that were the watchwords of his predecessor.

There is, as far as I can see, nothing in this budget for the private individual and absolutely nothing for the entrepreneur. There was nothing that would help the retail sector, manufacturers are left to cope as best as they can, and all too little for savers. Worse, though, is that the chancellor's lack of generosity suggests he's unaware that rising food and energy costs mean that inflation for most citizens is running at 6 per cent - not the 3 per cent that the headline figure suggests. By doing nothing to help borrowers and by giving a strong hint that he does not wish to see interest rates go down, Mr Darling is turning his back on those that the government has encouraged to borrow to the hilt and who are now struggling to make ends meet.

Twelve months on, it may seem ironic that Gordon Brown was forecasting government borrowings were on target to fall to £30bn in the current fiscal year. By November, Mr Darling had raised the borrowing target to £36bn. With the benefit of an additional £2bn in fuel tax receipts, courtesy of the soaring oil price, plus unexpectedly high corporation tax receipts, Mr Darling has at least been able to keep to one target. Of much greater concern is that having already raised the fiscal 2008-09 borrowing requirement to £38bn, he's now looking at £43bn for the current year - and there must now be concern that the Treasury could still be overstating the anticipated level of tax receipts, and that the real level of borrowings this year could be closer to £48bn. The Treasury is projecting that borrowings will fall in 2009-10 but, again, we hold a view that the government is seriously understating the economic downturn and the length of time before any upturn provides increased tax revenues. All this makes Mr Darling's view that borrowings will be down to £23bn by 2012 very hard to swallow.

The budget deficit is also a concern. Our own view is that government borrowing and budget deficit forecasts for each of the next three years reflect extreme levels of over-optimism. Taken together with the mere 2.2 per cent rise anticipated in public spending (which has risen 500 per cent since 1997) and the retreat on economic growth expectations to a more realistic 1.75-2.25 per cent range for 2008, such concerns surely have merit. We might also question why there should be a belief in the Treasury that a strong rebound to a range of 2.25-2.75 per cent might occur in fiscal 2008-09 and the 2.5-3 per cent indication for 2010. Our view is that these figures may be as much as 0.75 per cent too high in each of the next two fiscal years in question.

ABOUT THE AUTHOR...

Howard Wheeldon is senior strategist at BGC Brokers.

For more guest columns, go to www.investorschronicle.co.uk/Columnists/GuestColumnist

For full analysis of this year's budget, see our Budget Summary.

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