When Alistair Darling presented his first budget as Chancellor of the Exchequer in March 2008, the US mortgage markets were in meltdown and the credit markets barely functioning. But Darling remained confident that the United Kingdom was well-placed to “maintain stability” through the world economic slowdown. He bullishly predicted that the British economy would “continue to grow through this year and beyond”. The United Kingdom was the “most stable” economy in the G7, with growth expected to reach 2% in 2008. This stability was founded on tough fiscal rules that ensured debt was kept low and stable while the country would borrow only for investment over the economic cycle. National debt was now just 36.6% of GDP, Darling proudly revealed, down from over 43% when New Labour took power in 1997. He stated:
It is precisely our commitment to this discipline and stability that gives us the flexibility now to respond to the global economic challenges we face today.
In fact, according to Darling, the fiscal rules had been so well adhered to that the Pre-Budget projection for net borrowing at £36 billion for 2008 was £1.4 billion lower than forecast at the time of the Pre-Budget Report. Debt too was forecast to be lower than the Pre-Budget Report at 37.1 per cent. Or as Darling said:
This is a responsible approach – within the disciplines of our fiscal rules – that will help entrench the resilience of the UK’s economy.
So borrowing next year, which peaked at 7.8 per cent of national income by 1993, equivalent to £110 billion today, next year will rise to £43 billion, some 2.9 per cent of national income, less at its peak than the average level of borrowing between 1979 and 1997.
Because of the decisions taken in this Budget it will fall to 2.5 per cent, then 2 per cent, then 1.6 per cent and then 1.3 per cent by 2012/13, supporting stability and resilience in the economy.
That is £38 billion and then £32 billion, £27 billion and £23 billion by 2012/13. As a result of decisions in this and recent Budgets that come into effect this year – including a reduction in the main rate of income tax from 22 to 20 pence – fiscal policy is able to provide real support to the economy this year.
Unfortunately, things didn’t really work out as Darling planned.
– In the space of 12 months, government debt has risen to £750.3 billion, more than 50% of GDP, according to the Office for National Statistics (ONS). It was £487 billion three years ago.
– The government’s deficit has more than doubled to £78bn from £36.7bn.
– Government net borrowing is the equivalent of 5.4% of GDP.
– The debt figure includes the government’s rescue of Northern Rock but does not include subsequent bank bail-outs or treasury bills provided to the Bank of England for use in the Special Liquidity Scheme since April 2008.
– The unrevised growth rate for 2008 is now 0.7% with the economy shrinking 1.6% in the final quarter.
– Borrowing will likely total £140-170 billion a year over the next four years rather than slowly dropping from 38 to 23 billion.
Darling’s next budget is April 22nd, let’s hope he’s closer to the mark this time around.