Outlook for the Global Economy: The Budget 2009 Professor Joe Nellis SM Today we are going to talk about the recent budget. Joining me in the studio today is Professor Joe Nellis. Now Joe, ten years ago Gordon Brown said no more boom and bust. Well, we seem to have had the boom – are we now heading for the bust? JN Well we are in the “bust” officially of course. We have now had three quarters of negative growth, ie recession is fully with us. It’s a full blown recession. Bust of course might mean something else. Is it going to be a short term recession, or a long term recession – that would be a bust. I suspect we are in for a long term restructuring and rebalancing of the economy. SM So what are the key messages as far as you are concerned that came out of the budget? JN There are no key messages. This was simply a holding budget. I think the Chancellor has really tried to keep things on hold for the next election and whichever Chancellor comes into power, whichever government is in power, we are in for some very difficult decisions on both tax and government spending. SM The worrying thing that most commentators have mentioned, is the huge, huge increase in borrowing. There is talk of 80% of the GDP – would you like to say a bit more about that? JN This is the biggest aspect of that budget. In the next financial year we are going to borrow £175bn for the government account, which as you said, well in terms of the national debt, in terms of the total debt, that will bring total borrowing to 80% of GDP, but in one year. That is equal to 12.4% of our GDP. Now let’s put that in context. That compares to an average of 3% of GDP in one year in the previous three to four or five years. So this is exceptional by any standards. SM Could you say a bit more about the size of the national debt in relation to the GDP? JN Yes. Before this crisis, the national debt of the UK was running at somewhere around 40% of GDP. In the middle of this crisis it is now running at around 79% of GDP. That is not high by Italian standards, but it is very, very high by UK standards. But it is not the size of the debt today that really matters, it’s where it is going in the next few years. And we are expecting total government borrowing to add to that debt something of the order of £700bn over the Professor Joe Nellis
next five years. SM What are the implications of that for the average man or woman in the street? JN Very clear – it is going to take thirty to forty years for this national debt, relative to the size of the economy, to get back to more normal levels. What that means is the average man and woman in the street, and their children, and their grandchildren will be paying back this debt through increased taxes of one form or another for many years to come – thirty to forty years. At the same time, of course, if those average people as you put it are within the public sector there is going to be a long term squeeze on government spending on health, education, road building, etc. This is a long term readjustment, rebalancing, restructuring of this economy. SM The thing that has got the most publicity is the introduction of a 50% tax rate. Is this going to be a good thing, or a bad thing? JN Well, it’s a red herring. The number of people who pay that rate of tax will be less than 1%, or approximately 1%. And of course many of those people will be the very people who will be able to afford accountants to find ways of minimising the amount of tax they pay. So the tax take from this headline grabbing change is really going to be very small. It looks like a return to Old Labour In terms of squeezing tax from the rich until they squeak. There are a number of people, of course, in recent days who have commentated that this could lead to a brain drain or a talent drain from Britain, of the type we saw in the 1970s when many of our leading artists, singers and performers left the country because of high tax. This really is tokenism on the part of the government. SM Many people have said that the government projections of growth are pure fairyland – do you agree with that? JN I do agree with that. Remember the Chancellor had predicted for this year we would have a recession of something like 3.5%, a fall in output of 3.5% and yet, the day after the budget we had the official figures coming out for GDP – this country’s official figures, which showed output falling, or had fallen, by 1.9% in one quarter. Now we have got three more quarters remaining – it’s unthinkable that it will only end up at 3.5%. The IMF has challenged this and they are predicting 4.1% fall in GDP. By any standards it’s bad, but I think the government really should be criticised for being a little bit economical with the truth. Or perhaps over optimistic. I suspect we will see these figures revised in the coming quarters. SM Let me project ahead eighteen months and say with your best economist’s hat on – and this really is a finger in the air job – what do you Page 2
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see the situation is going to be like then? JN Well briefly, the government are predicting in 2010 a recovery of 1.25% and growth thereafter for the next three years of 3.5% per year. I don’t think we will see anything like that. I think next year at best we will stand still – at best. Could be a slight negative, but margins of errors will take care of that. I think thereafter, if we see growth even going anywhere near trend, which will be roughly 2.75%, that would be excellent news. Now I have criticised the government for being over optimistic, but just to give a little ray of hope – if you look at previous recessions, yes we have seen a bounce back in the three or four years after previous recessions. That is not surprising because when the economy slows down there is a lot of slackness – a lot of spare capacity – and of course, you then can grow fairly quickly with spare capacity. The problem is that those previous recessions were what we might call ‘normal recessions’, caused by exports falling, investments falling, consumer spending falling, etc. The roots of this recession, as we said before on previous occasions, is a financial driven recession. This is not an average or normal recession and therefore we are of the view that this will take longer to recover from and it will be deeper than before. SM A sombre note to end on. Thank you Joe. JN Thank you Steve. Page 3