A budget blind to reality

Published 22 April 2009

The Director General of the Institute of Directors offers a perspective on the 2009 Budget from the business community

The 2009 Budget numbers were eye watering. Between now and 2014 the Chancellor expects to borrow £700 billion, and this number would be higher but for strikingly optimistic GDP growth forecasts. A worst case scenario could see £200 billion per annum deficits, leading to borrowing of £1 trillion between now and 2014. It is that bad.

The Chancellor faced three simultaneous problems. First, he has an election this year or next and so tightening fiscal policy in the run-up was always going to be ruled out. Second, he has a recession and tightening fiscal policy now would make matters worse rather than better. Finally, he had to satisfy financial markets that there was a credible plan for the restoration of the public finances in the long-term.

The Chancellor has achieved a very small fiscal stimulus this year followed by a tightening in fiscal policy from next year onwards, through tax rises and smaller increases in public spending. Real expenditure growth of 0.7 per cent per annum is very tight, but unfortunately it is not tight enough. The Institute of Directors has called for a real terms freeze in public spending, not just for the next five years but for the next decade. This may seem an unrealistic proposition until you remember that we live in extraordinary times with truly massive deficits.

To suggest that in the wake of borrowing of £0.7 to £1.0 trillion over the next five years the public sector can somehow operate a business as usual policy is absurd. Faced with a problem of this magnitude the private sector wouldn’t even achieve zero real terms growth. The private sector would have to massively reduce costs. The public sector will have to do the same.

As a nation we have to face up to some very difficult choices. We either squeeze public spending or higher taxation will squeeze the life out of the economy.

Miles Templeman is Director General of the Institute of Directors

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1 comment from readers

taghioff.info
23 April 2009 at 02:47

"Higher Taxation will squeeze the life out of the Economy"

Oh, just like it does in Sweden, Finland, Norway, Germany and France? Because all those crazy countries with their higher taxes and tighter controls on finance and business are now seeing the error of their ways.

Ahem. There is indeed bankrupcy in the UK and US, of the moral kind, from the constituency that called for low taxes and for business and finance to be given a free hand, saying it would lead to long-term prosperity, It didn't.

Who survived the resulting storm best? The countries who had higher taxes and thus could afford, and sympathise with, better regulation and implementation.

And the UK and US? Financial New Orleans.