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| We don't believe you, Darling |
| Neil Collins / Mar 17, 2010, 00:56 IST |
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UK budget deficit: The European Commission is demanding that Britain produce a plan to cut its fiscal deficit to below 3 per cent of GDP. Brussels feels obliged to do this, but its demand entirely misses the point. The UK government’s projection of a 4.6 per cent deficit by 2014-15 is already incredible.
To meet it would require spending cuts equal to the entire cost of the National Health Service in England, or tax increases equivalent to raising value added tax to more than 30 per cent.
The Commission report demands “measures beyond those currently planned” but nobody outside the UK Treasury knows what the planned measures are. Last December’s Pre-Budget Report did not dare disclose them. It contained spending budgets for government departments only as far as 2010-11, the financial year that starts next month.
Those running the departments know that deep cuts are coming, but sensible planning is impossible without detailed projections. When Chancellor Alistair Darling delivers his budget next Wednesday, he will again refuse to spell out where the pain is going to be most acute. This is risky enough to his shrinking credibility, but the economic backdrop is also worse than it was in December, when Darling forecast a fall of 3.5 per cent in GDP for the year ending this month. Britain’s sluggish climb from recession means that the economy would have to grow by 1.3 per cent in the current quarter to meet his forecast. The growth projections for the new fiscal year also look a lot less plausible than they did four months ago. And the assumption of 3.25 per cent compound growth starting in 2011-12 now looks like a fantasy in an economy that will be struggling with debt and high taxes.
Growth is the only way to avoid a debt trap, where the cost of financing the deficit outruns the capacity of the economy to repay it. Darling desperately needs to convince Britain’s creditors the deficit is under control. He may shrug off the latest attack from Brussels, but the chances of a catastrophic loss of confidence remain as high as ever.
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