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How much use is a brief, small VAT reduction?

by Scott Bicheno on 25 November 2008, 17:57

Tags: HM Treasury

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Debt to the rescue

All this extra stimulus comes at a cost, of course, and this will take the form of yet more national debt which. Thanks to the bailout of the banks, a reduction of tax receipts as a result of the bank collapse and the recession and a massive increase in public spending in recent years, national debt is already snowballing.

Here are some more excerpts from Darling's speech:

"The IMF is forecasting a year-long fall in output next year across all advanced economies, the first time this will have happened since 1945."

"GDP growth for 2009 [for the UK] is forecast to be between -¾ per cent and -1 ¼ per cent."

"Inflation is forecast to come down sharply, reaching ½ per cent by the end of next year."

"So I am forecasting growth of between 1 ½ and 2 per cent in 2010."

"As a result of the combined effect of lower revenues, our commitment to maintain spending and extra support to the economy, borrowing will rise to £78bn this year and £118bn next, or 8.0 per cent of GDP."

"But then, from 2010, as I take action to reduce borrowing when the economy begins to recover, borrowing will fall to £105bn, £87bn, £70bn and £54bn."

"And by 2015/16, we will again be borrowing only to invest."

"UK net debt, as a share of GDP, will increase from 41 per cent this year, to 48 per cent in 2009/10, 53 per cent in 2010/11, before peaking at 57 per cent in 2013/14."

Gordon Brown's self imposed ‘Golden Rule' when he was Chancellor is to borrow only to invest (as opposed to service debt or just boost the economy) over the course of an economic cycle. This statement reveals that the Golden Rule has been abandoned for this cycle but they promise to go back to it by 2016.