Pre-Budget Report 2009 - Public Finances "a dreadful mess".
KPMG Chief Economist Andrew Smith; "no magic wand"
Wednesday, 9 December 2009
The Chancellor confirmed that the public finances are in a dreadful mess and that even if the economy rebounds strongly - and that's a big if - they will remain in a dreadful mess.
There is no magic wand. The bottom line is that higher taxes and NICs, reduced public service provision and the likely imposition of user-fees for previously "free” services add up to a cut in the standard of living for pretty much everyone. Welcome to the new Age of Austerity.
The aim is to halve the deficit over the next four years through a combination of cyclical recovery, tax rises and spending cuts but that will still leave a £100 billion hole in 2014. Further medicine will be necessary if the gap is to be closed by 2018.
Mr Darling's plan is long on strategy but short on detail. We still do not have detailed plans on where the spending axe will fall but to the extent that certain areas such as schools, hospitals and the police are "protected”, cuts elsewhere will have to be all the larger.
If the buoyant growth forecast is to be achieved, the structure of the economy will have to change drastically. Growth over the past decade has been fuelled by consumer borrowing and spending which has ultimately proved unsustainable.
In future, growth will have to be of the more durable kind, built on savings, investment and exports. The decline in the value of the pound over the last few years, which makes exports and import-substitution more profitable, should encourage the start of the necessary shift in productive resources into these sectors.
The only bright spot is that the corollary of tight fiscal policy will be loose monetary policy. Interest rates will have to stay low even as the economy recovers.
Ends
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