April 7, 2008 | posted by Michael Baxter in UK economy |

Cast your mind back to four weeks ago tomorrow. It was Budget day, and Alistair Darling tried to reassure us.

Our chancellor said the UK will grow by between 1.75 per cent and 2.25 per cent in 2008, well clear of recession levels.  Then, Mr Darling reckons the economy will pick up, and grow around the level of the long-term average of between 2.25 per cent to 2.75 per cent.

Based on those assumptions, he went on to say Government debt levels are forecast to be 38.5, 39.4, 39.8, 39.7 and 39.3 per cent of GDP by 2012/13.

Now that was quite interesting, because, as you may recall, he is supposed to follow two rules – the famous Golden rule, and the not-so-famous Sustainable Investment rule – which is supposed to restrict public net debt to 40 per cent of GDP.  But by Mr Darling’s own estimates, in the year after next, net debt will be just 0.2 percentage points of breaking his Sustainable Investment rule – leaving a tiny amount of room for error.

And here is the worry, in making these projections, he assumed 2009 will see a pick up – whereas most expect next year to be worse than this.

Now, the Treasury Select Committee has entered the debate, and it is bad news for Mr Darling.

“The Treasury’s optimism is based on its contention that the UK economy is better placed than other OECD economies in the face of market turmoil,” said the Committee, and, “We remain concerned that some of the economy’s characteristics that have proven beneficial during past crises might prove to be conduits through which the current problems in global financial markets are transmitted to the UK real economy.”

John McFall, chair of the Committee, says: “The Treasury’s forecast of economic growth in the next two years is more optimistic than the consensus view… There are significant downside risks to the economy and therefore potentially to tax receipts.”

The Select Committee is right.     The current economic crisis relates to debt – and countries that see high levels of consumer debt are most vulnerable, and the UK is near the top of the list.

Recall comments made by the IMF last week: “Particularly at risk [is] the UK housing market, where the financial crisis is exacerbating issues of affordability and general economic gloom”– it seems absurd to claim that the UK is better placed than other OECD economies.