January 31, 2008 | posted by Michael Baxter in UK economy |

Alistair Darling would need to announce fresh tax increases worth about 8 billion in this year’s Budget to keep public sector debt below the Government’s self-imposed ceiling, and to bring about the improvement in the public finances over the next five years that the Treasury wants to see, or so says the Institute of Fiscal Affairs (IFS).

The IFS has worked out its own – green budget – and even it is only slightly right; the Government seems to be stuck between the devil and the deep blue sea.

“Over the next five years,” says the IFS “to cut borrowing and comply with its self-imposed fiscal rules, the Government is planning to increase the tax burden to a 24-year high and cut public spending to an 8-year low as a share of national income. This would involve the Government taking 48 per cent of the proceeds of growth (the extra real income generated by the economy) in tax and other revenues over the next five years, up from 45 per cent under Labour to date and 30 per cent under the previous Conservative government.

“But we fear that tax revenues will not grow as strongly as the Treasury hopes, as the impact of the credit crunch and a weak outlook for profit growth depress Corporation Tax receipts and as weaker share and property prices reduce Stamp Duty revenues.”

The IFS concludes, “We expect the Government to have to borrow more than 40 billion this year, next year and in 2009-10. We expect public sector net debt to hit the Government’s ceiling of 40 per cent of national income in 2009-10 and to rise to 41.2 per cent by 2012-13. The Government would also break its golden rule (to borrow only to pay for investment) over the new economic cycle, unless that cycle lasts at least a decade.”

But all that is counting without Northern Rock. A possible decision by the Office for National Statistics to put Northern Rock on the public sector balance sheet would probably add 100 billion or 7 per cent of national income to public sector net debt, easily breaching Gordon Brown’s ceiling of 40 per cent of national income – although the eventual impact will be much smaller once Northern Rock’s mortgage book is sold.

And that’s the problem. In the US, the government is planning to give $150bn back to the taxpayer. But in the UK, we are still paying for the last round of fiscal expansion.

The idea behind Gordon’s golden rule is that it’s okay for the government to borrow in the lean years, providing it pays back in the years of plenty. The snag is, the economy, it appears, had developed the habit of relying on government spending. We staved off recession earlier this decade, in part thanks to Gordon’s spending. But, what happens if the next big threat comes along while you are still getting over the last one?