The heavy cost of curbing the recession
The figures to look for in the Pre-Budget Report are not next year’s but the five-year forecasts. It’s not the cost of coping with recession that will shock us but the cost of paying for it in years to come.
It is little consolation for chancellor Alistair Darling that the Germans have gone into recession first: even he admits we’re there too, though we still have to wait for the second quarter of negative growth to end.
And the solution to a problem caused by high debt is more debt. Government has pledged £500bn to save the banks, some of that in equity. It is now going to borrow to allow higher state spending and lower taxation in the hope we spend too. And it will need to borrow to replace taxes such as stamp duty, capital gains and on bank profits – even VAT – that dry up during a recession.
It may succeed in keeping the economy ticking over but this debt must ultimately be paid for, and that will mean massive tax rises in years to come. If the recession lasts two years, the Treasury needs to generate sufficient income from the third year to service the massive borrowing and start to repay it.
The objective of “no more boom and bust” has already failed but we need to ensure the failure continues: we need another boom to finance the cost of surviving the recession. But if taxes are imposed immediately the economy turns up, they will suppress the recovery before it has a chance to flourish.
The recession will last roughly until the next general election and the key issue in that vote will be how the tax is recovered. Whether it is a direct tax on business or a wider tax on consumers - or a specific levy on a City that might by then be recovering - will divide the parties. They cannot rely solely on selling the equity stakes in the banks to finance the debt.
In truth, the future-year figures in the Pre-Budget Report on 24 November may turn out to be wishful thinking, but if anything, they will underestimate the problem we are storing up.
