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The budget after next

Evan Davis | 12:57 UK time, Monday, 6 April 2009

Numbers have grown bigger in the last year or two.

It used to be the case that £10bn sounded like a lot of money. But after 18 months of banking crisis, we've all become confused.

The Chancellor of the Exchequer's budget red box Government borrowing was meant to be about £30bn, but will turn out closer to £150bn. The bank assets being underwritten by the taxpayer are £650bn. With numbers like these, (not to mention taxpayer exposure to bank liabilities running to trillions) why argue over the odd three or four billion? It seems to be worrying about the pennies when the pounds are evaporating.

Well, we at the Today programme thought it was a good idea to cut through the disorientation and ask what the long term effect of banking crisis plus recession has on the typical taxpayer. The answer is... £3.50 a day.

That number comes from the Institute for Fiscal Studies. We asked them for a "best guess" as to what the next parliament would have to do to reduce government borrowing under various reasonable assumptions about the economy, the recession and losses from banks.

There's no-one better to go to on this kind of issue than the IFS. Their independence is beyond doubt as all the main political parties recognise their expertise.

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In essence, they think that 2.7% of national income has to be devoted to reducing government borrowing by 2016. That's in addition to the measures amounting to 2.6 % or so that Alistair Darling announced in the pre-budget report.

An overall fiscal tightening of about 5% of national income.

If you want to know what just the 2.7% of extra measures means - it is £1,250 per family per year in today's money, which you can divide by 365 to get £3.42 a day (which we round up to 3.50 to avoid spurious precision).

Now nobody really knows how bad things will be, so the results do depend on the assumptions you make. The full IFS thinking has been published, and you can find it here.

What is striking about the figures though, is that the assumptions the IFS makes about the cost of bank rescues and the hundreds of billions of pounds of recession-related government borrowing are less important in driving the results than one would think.

Those big incomprehensible numbers we have been hearing about are usually one-off numbers, and reduce to much smaller, comprehensible figures when translated into our annual tax payments.

Take an example for sake of simplicity. Assume we lose a plausible £100bn in our "investments" in Royal Bank of Scotland. What does that boil down to?

Well, fortunately we don't have to find that £100bn every day or even in one go; its effect is to push up the national debt. At five per cent interest rates, an extra £100bn of borrowing costs the state about £5bn a year to service or about £3 a week for the average family.

That is not to be sneezed at, as it is incurred year after year after year... but it is not life-changing, certainly not compared to a fiscal tightening in the next parliament of five per cent of national income.

The same argument applies to the costs of fiscal stimulus packages.

Suppose we spend another £20bn on a new package. Like a bank rescue, that is again a one-off cost. Again, it is modest in the context of the overall fiscal tightening needed in the next parliament, adding "only" £1bn to the total of about £40bn.

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It turns out that two unpredictable factors are more important than bank losses and one-off borrowing in driving the IFS view of how much pain taxpayers will suffer.

One is the rate of interest on government debt. With a trillion pounds of debt, a one per cent difference is £10bn a year.

The other is how well the economy recovers in the long term.

If the economy bounces back to its old trajectory of income and growth, the long term effect of the recession is small. On the other hand, if the economy bounces back to a new trajectory where, say, we are all permanently six per cent poorer than we had thought we'd be before the crisis, the finances look terrible.

Alas, none of us know what the interest rate will be on government debt, or how much of the current economic decline will be reversed when recovery comes. The IFS projections are only as good as their assumptions. Things could be a lot worse or a lot better.

But the message is that when it comes to taxing and spending, it is the on-going performance of the economy in the long term that matters most.

Comments

  • Comment number 1.

    Making the whole crisis comprehensible in terms of personal repayment does make the whole thing a lot simpler! If only we could nail down the government at £3.50 a day, as you say, things could be a lot worse...

  • Comment number 2.

    Good to see you back in the world of economics.

    We all love your BBC colleagues Robert Peston, Stephanie Flanders and Paul Mason and it's good to have another intelligent voice to help us mere mortals try to make sense of it all.

    All I know is that the more debt you have, the harder your life becomes until in the end you're swamped by it and the interest payments on the debt become greater than your ability to pay and then you're..............bankrupt!

    This could yet happen to us in Britain if we're not careful.

    In the mean time the (well-loved by Labour) "hard-working families" of Britain are running faster and faster on the treadmill trying to make ends meet when a bigger and bigger slice of their take-home pay is taken off them in the form of taxes before they even see it.

  • Comment number 3.

    Just heard you grilling George Osborne about this - good to hear this level of economic discussion on Today, explaining things simply and then being able to hold politicians to account on the details of their plans (or absence thereof). With any of the other presenters, I suspect Osborne would've been more able to waffle on about public sector pay and government irresponsibility while dodging the real issues and details. He didn't come out of the interview with much credibility. I was left wondering whether it's possible that they still don't have a detailed plan of action, or whether they're just reluctant to reveal it.

  • Comment number 4.

    This is where I come in for industrial quantities of scorn/mirth/pity but I don't understand!

    1. Exactly what is all this money which has been lost - toxic debts and so on? What is it? Is it value rather than money? If it's money, as in figures on a screen, where/who did it pass to?

    2. If we all have to pay this £3.50 a day, that's actual 'hard' money we won't get, so where does that go? And what is the relationship between this money and all the noughts?

    Sorry to be dim....

  • Comment number 5.

    Evan

    Would that GBP 3.50 be before or after deductions for income tax and NICS? Surely it has to be deemed as net income and so the real number related to earnings is nearly a fiver a day. Rather a lot: equal to seven nice cakes from the baker or a middling bottle of wine from the offy to express it in terms of simple pleasures.

    It is in the simple pleasures that the economy currently inflicts its toll on the majority who are fortunate to remain in work. A fiver a day to an unemployed person on job-seekers allowance is more than half their income.

    You are right that it is our ability as a country to recover from this which is the issue. I regret that given the size of the public debt, the expectation that all this can be funded by additional taxation without damaging any recovery, and the absence of any leadership from any quarter does not bode well.

    I cannot see an end to this and that bothers me more than the problem itself!

  • Comment number 6.

    I have to say I am intrigued as to what the 'great and good' of BBC political blogging will find newsworthy enough to discuss upon the great St. Trinian's post-hols return.

    Hint... regular interview-friendly guys (sorry:) like Sir Mike and Kevin Maguire not doing so well, even on home ground.

    Best take another few weeks off.

    There's always the US President's pooch. It has four legs. But the current stories in the blogosphere seem to have longer ones.

  • Comment number 7.

    Evan,

    Please copy Stephanie.

    We will not return to where we were next year or the year after because our spending over the last few years was the result of credit. GDP might have risen some 3% year after year but it was not because we were doing well but because individuals, corporations and government were taking subs and spending tomorrow's income today.

    The 1990's was jam today.

    David Lilley

  • Comment number 8.

    Evan,

    I have a second more general comment.

    We should not blame the recession on capitalism or bankers or economists.

    1. We replaced capitalism with state interventionism starting 150 years ago yet we still refer to capitalism all the time.

    2. Our bankers and financial services industry became our biggest industry contributing to employment, invisible earnings and tax revenues. They saved our bacon.

    3. Economics is a science as it meets the falsifability criterion demarcating science from psuedo-science. Economic models only fail because they cannot build in fear and exuberance.

    David Lilley

  • Comment number 9.

    Is this thread ever likely to get updated?

    or are we actually waiting for the budget after next before a new post?

    Anyhoo, as one has just happened..

    I think we now have a 'Dr. Pepper' government: "What's the worst that could happen... that we haven't already done?"

    At least on some channels they might need to pay for that message to be carried uncritically.

 

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