In recent years, Budgets have been rather boring, a mirage of prosperity rendering them a sideshow. However, last month’s crossed the Rubicon. The Chancellor believes there will be a rapid economic recovery and while the economy will contract by 3.5% this year, he plumps for growth of 1.25% in 2010 followed by 3.5% in 2011. Of course, he could be right but in our view, Hans Christian Anderson would have struggled to concoct a better fairy story. On second thoughts, against those forecasts, even Thumbelina and the Little Mermaid start to look believable.
Now, we all have our moments of make believe. I awake regularly to multiple delusions; Leeds United winning the Premier League and my wife finally having enough shoes are but two. I know they are ludicrous but at least I have the excuse that these appalling errors of judgement were committed while I slept. Mr Darling’s, on the other hand, are made while he is (seemingly) awake. How likely is it that the UK’s economic growth rate will match that of the last decade shorn of easy credit, mortgage equity withdrawal, public sector largesse and high levels of employment?
The problem with the above forecast is that if Mr Darling is not proved correct, the UK’s financial position will be even worse. In last year’s Budget, he forecast a borrowing requirement to 2011 of £70bn. However, on Budget day 2009, he told us it would be £350bn. Move out to 2014 and the UK will need to raise £700bn of debt; a mere £265bn more than that forecast last November. Don’t forget; this is if the growth forecasts are accurate. If they aren’t, then a truly dire situation will border on the apocalyptic.
It is, therefore, not surprising that Sterling continues to fall. Similar comments apply to conventional government bonds (Gilts) which have started to weaken as the full horror of the government’s funding requirement becomes evident. In fact, the Chancellor plans to raise £220bn in gilt sales this financial year alone; a threefold increase on last year. At this rate, we’ll be getting them in cornflake packets. It is only a matter of time before buyers (especially foreign) choke on such excess issuance and demand higher yields.
To be fair to Mr Darling, the unenviable position he now finds himself in is not of his making. He is simply the poor soul tasked with cleaning up the mess. Chancellor of the Exchequer may be one of the Great Offices of State but to use a sporting metaphor, his appointment amounted to nothing less than a hospital pass from his boss. Here we see the real villain of the piece with regard to the brutal coshing of the public finances; it was Reverend Brown, in the Cabinet room with the lead piping.
John Newsome can be contacted on: 01423 705123 or email:john.newsome@williams-im.com
