Darling's Recession Debt Crisis Budget, Britain's £1.2 Trillion Public Sector Black Hole

By: Nadeem_Walayat

Darlings irresponsible budget resulted in a a net give away of £5 billion today, against borrowing of £175 billion for 2009 as against the Chancellors own forecast of barely 6 months ago of borrowing of £38 billion. Instead of positioning the countries finances to cope with the huge public sector budget deficit the government has instead focused itself on the next general election which is still a year away.

The governments optimistic forecasts have been well and truly busted as the below graph illustrates the difference between expected budget deficits against Wednesdays revisions, set against my own budget deficit forecast.

Alistair Darlings forecast for government net borrowing over the next 4 years in November 2008 totaled just £120 billion which was in total denial of the collapse of the UK economy that had fallen off of the edge of a cliff during the summer of 2008 and accelerated during the September / October financial crisis. The magnitude of the level of the budgetary crisis is now some six months later being publicly acknowledged by revised forecasts for the budget deficit that the Chancellor now sees totaling £608 billion instead of the £120 billion forecast of November 08. This is still significantly below my forecast total of £735 billion and therefore the expectation remains for further revisions to the upside over the coming years.

Britain on the Path to Bankruptcy

The level of debt is exploding higher, both that which is on the visible balance sheet as well as off the balance sheet tax payer liabilities that now project a rise from £1.5 trillion at the end of 2007 to £3.5 trillion by the end of 2010. As pointed out several times over the past 12 months following the Bank of England's initial £50 billion hand out to the soon to be Bankrupt banks in April 2008 that loan would in all likelihood never be repaid and mark the start of a series of hundred billion pound loans that would put Britain on the path towards a debt crisis that in the first instance would manifest itself in a sterling bear market whilst the Bank of England remained paralysed by the fear of inflation and failed to respond to the housing market crash of 2007-2009 until forced to do so in October 2008.

As the government issues more debt, i.e. gilts then the market will demand ever higher interest charges which means ever higher debt servicing costs. Taking the official debt, i.e. Public Sector Net Debt of £624 billion at the end of 2008 at a rate of 4% costs Britain £25 billion per year to service. However public sector net debt is expected to mushroom to 1359 billion by the end of 2012, which at 4% would demand a servicing cost of £54 billion a year. If however interest rates are significantly higher which is highly probable than the service costs at 7% would cost Britain £95 billion a year, these interest payments can only mean much higher taxes.

My Interest rate forecast of 4th December 2008, reflects this upward curve during the second half of 2009 as the economy begins to stabilise from free fall following the governments borrowing and spending binge.

UK Tax Rises, 50% Higher Rate, 30% Basic Rate

As my pre-budget analysis concluded that UK tax payers should prepare for significant tax hikes as the government attempts to stabilise the countries finances, where the expectation is for half the tax rises to be stealth taxes and other half to be direct income tax hikes, where the forecast is for tax hikes to come in force following the next election and targeting 50% for the higher rate and 30% for the basic rate. Following the budget the government has now signaled an increase in the upper 50% tax rate that will come in force in April 2010 and aimed at all those earning above £150,000. However the amount of revenue raised will total just £7 billion per year which is far below the level of the £175 billion annual budget deficit that warrants tax hikes in the region of 50% for all those earning above £50,000 as well as raising the basic income tax rate rising to 30% which would be political suicide and therefore the announcement of which will be DELAYED until AFTER the next election.

Only severe tax hikes can hope to bring the budget back under control as there exists the real risk of out of control budget deficits that eventually result in a debt default and bankruptcy as the country is no longer able to service a ballooning debt mountain.

UK Recession Forecast

Alistair Darling is forecasting another miracle, the miracle is that the economy will bounce back in 2010 and grow by 1.25% followed by an incredulous 3.5% boom time during 2011. To remind readers that 6 months ago the Chancellor was forecasting contraction of -1% for this year, which he has now been forced to revise lower to -3.5%, which is against my forecast of Feb 2009 of -4.3% and total peak to trough contraction of -6.3%. Whilst a bounce back is expected however the tax hikes and spending cuts will in all likelihood trigger a double dip recession during 2011 to 2012, therefore instead of growth of 3.5%, we may start to see the economy head for another recession during 2012. What this means is that there will be a major shortfall in tax revenues and therefore a continuing budget deficits and hence deeper public spending cuts.

Outlook for Investors

The huge amount of debt that is going to be issued is not going to be conducive towards rising bond prices, therefore government bonds are expected to fall, as interest rates are forced higher to attract foreign investors. Similarly consumers hit by the tax hikes are expected to continue to cut back on purchases and therefore continue to impact on the retail and consumer durable sectors that looks set to remain depressed for many years.

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By Nadeem Walayat
http://www.marketoracle.co.uk

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Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 250 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

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