Only a few days to go: We’re raising £25,000 to keep TheyWorkForYou running and make sure people across the UK can hold their elected representatives to account.

Donate to our crowdfunder

Pre-Budget Report

Part of Oral Answers to Questions — Work and Pensions – in the House of Commons at 3:29 pm on 24th November 2008.

Alert me about debates like this

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer 3:29 pm, 24th November 2008

The Crown dependencies, such as the Isle of Man and the Channel Islands, attract banking customers with lower taxes—without contributing to the UK Exchequer. But at times of stress, depositors need to know who will compensate them. The British taxpayer cannot be expected to be the guarantor of last resort, so I have asked for a review of those regulatory arrangements, which will report to me in the spring.

Secondly, we must resolve the situation highlighted by the Icelandic bank, Landsbanki, where billions of pounds of British savers' money was deposited in a foreign bank, with branches in the UK, with insufficient safeguards for those depositors. They were not adequately covered by the compensation scheme of the Icelandic authorities, so we had to step in to guarantee UK savers' money. So we are taking the lead at the European Union to tackle these shortcomings in international compensation arrangements. We cannot allow that situation to continue, and we have asked the European Commission to come back with recommendations by the spring.

A strong banking system is vital to the health of our economy. It needs to be fair and open, offering a range of services and lending demanded by consumers. Because of the Government's action over the past year, no retail depositors in British banks have lost out. Last month, we took action to improve confidence in the banking system and recapitalise the banks. By next month, banks will have accessed some £100 billion of funding under the credit guarantee scheme. Now that the scheme is up and running, and other countries are beginning to implement their own schemes, it is time to explore how it can further support lending to families and business. We shall continue to monitor the working of the scheme and improve it if necessary. I shall announce any changes shortly.

But we also know that the process to allow UK banks to raise money in the markets, through rights issues, is too slow and complex. Today, the rights issues review group, which I set up, has reported. I shall pursue its recommendations in full, which will make the process for raising equity capital faster and simpler. All these steps are aimed at combating instability, restoring confidence and improving protection for depositors, while defending the taxpayers' interests.

Our economy cannot insulate itself from this global financial turmoil, but the UK economy faces these challenges from a position of relative strength compared to the past. Even today, employment remains near record highs. The claimant count, while rising, is 2 million below the level of the 1990s. There are still today over half a million unfilled vacancies in the economy. Government debt last year was among the lowest in the major advanced economies. At the same time, we have been able to triple public investment in key services, transport and infrastructure. We did fix the many roofs that needed fixing—the roofs of schools and hospitals throughout the United Kingdom. While all other major economies suffered recessions, we saw the longest period of continuous growth in the history of this country. That has brought immense benefits, and tens of thousands of jobs across England, Scotland, Wales and Northern Ireland.

The UK is the world's leading financial centre, but because of the size of our financial sector we are likely to be affected more directly by a global financial recession. New lending has shrunk, down by a third since March. With mortgages harder to get and more expensive, this has hit property markets, with prices falling by 11 per cent. over the same period.

Mirroring the big falls in the world stock markets, UK share prices are down by almost a third. These falls came as businesses and families were already having to meet rising energy and food bills, which squeezed incomes and led to lower spending on other goods and services. The combination of higher prices and tighter credit has inevitably put downward pressure on growth here in the UK and across the world. The volatility in prices was underlined last month when inflation fell from 5.2 per cent. to 4.5 per cent, the biggest monthly drop in 12 years. But while it is volatile, inflation is expected to continue to fall, and this has already made room for the Bank of England to cut interest rates by 2 percentage points since October, to a 50-year low of 3 per cent. For the millions of people on tracker mortgages, this cut in interest rates will be worth on average around £100 a month off their mortgage payments. But monetary policy—interest rates—on its own is not enough to stimulate the economy, as most people recognise. So we need action now to boost economic activity, together with the real help that I will announce today, to help us to emerge more more quickly, and to emerge stronger, from these difficult times and to face the future with confidence.

I now turn to the detail of the economic forecast. These forecasts are made against a background of sharply deteriorating conditions across the world. The International Monetary Fund is forecasting a year-long fall in output next year across all advanced economies—;the first time that this will have happened since 1945. The UK is no exception. UK GDP contracted by 0.5 per cent. in the three months to September. Growth this year is forecast to be ¾ per cent., which reflects a further fall in output in the fourth quarter of this year. The IMF is forecasting that the United States, Germany, Japan, France and Italy—as well as the UK—will all contract next year as a result of weak consumer spending and business investment.

I, too, am forecasting that output will continue to fall in the UK for the first two quarters of next year. But then, because of decisions taken in this pre-Budget report, I expect it to start to recover, and GDP growth for 2009 is forecast to be between minus ¾ per cent. and minus 1¼ per cent.

Inflation is forecast to come down sharply, reaching ½ per cent. by the end of next year. Lower commodity prices and lower interest rates, which boost incomes and help business profits, together with the fiscal reaction across the world, will also help. As an open and flexible economy, the UK is well positioned to benefit from this recovery. As a result, and as the world economy recovers from the credit crunch, the United Kingdom's economy will begin to grow again. I am forecasting growth of between 1½ and 2 per cent. in 2010. In the years after that, the economy will continue to recover. Trend output—or the productive potential of the economy—will initially fall, but in future years the economy will recover towards a rate of trend growth of around 2¾ per cent.

Every country in the world is facing the impact of this crisis on its own economy, but there is a growing international consensus—although unfortunately not shared in the House—that we must act now to protect people and to help pull our economies out of recession, for there is a choice. One can choose to walk away, let the recession take its course, adopt a sink-or-swim attitude and let families go to the wall. That is no action plan. Or one could decide, as I have decided and as Governments of every shade around the world have decided, to support businesses and to support families by increasing borrowing, which will also reduce the impact and length of the recession.

I will do whatever it takes to support people through these difficult times. That is why my pre-Budget report today represents a substantial fiscal loosening to help the economy now with a £20 billion fiscal stimulus between now and April 2010, around 1 per cent. of GDP.

Before I describe the detail of how the Government will support people, let me turn to the fiscal framework that will help us to ensure fiscal sustainability. The Government introduced the code for fiscal stability in 1998, committing themselves to conducting fiscal policy in accordance with a clearly stated set of principles.

Our objectives are and remain to support the economy, to ensure medium-term sustainability and to maintain public investment. It meant that we were able to more than triple public net investment from 0.6 per cent. of GDP in 1997 to over 2 per cent. now. At the same time, we cut the Government debt from 43 per cent. of GDP in 1997 to 36 per cent. in 2007. Today, I publish the Treasury's assessment of the last economic cycle, which is supported by the independent National Audit Office. It shows that the last cycle started in 1997 and finished in the second half of 2006, and this means that the Government met both their fiscal rules over the last cycle.

The average current budget balance, over the cycle, was 0.1 per cent of GDP. But today, Britain—like every other country in the world—faces an extraordinary global crisis, which means significantly lower tax revenues, both now and in the medium term. In the current circumstances, to apply these rules in a rigid manner would be perverse and damaging. We would have to take money out of the economy, making a difficult situation worse. So it is right that, in this pre-Budget report, we do all we can to support the economy, but also to ensure fiscal sustainability in the medium term.

Consistent with the code for fiscal stability, the Government are setting a temporary operating rule that requires us to set policies to improve the cyclically adjusted current budget each year, once the economy emerges from the downturn, so that it reaches balance and debt is falling as a proportion of GDP once the global shocks have worked their way through the economy in full.

The fiscal projections that I set out in this pre-Budget report are consistent with returning to current balance and debt falling as a share of the economy by 2015-16. They imply, as the economy emerges from the downturn, an adjustment in the cyclically adjusted current balance of over 0.5 per cent. a year from 2010-11, which will set us on a path to deliver our objectives of supporting the economy, ensuring sustainability and maintaining public investment. In addition, to increase transparency even more, I have asked the NAO to audit the Treasury's analysis of the cyclical fiscal position.

I now want to turn to the forecast for the public finances. Because of the economic situation, tax revenues are falling across the world. As company profits fall, so do the proceeds from corporation tax. Receipts from the financial sector alone are expected to reduce by 35 per cent. this year. Slower growth in wages means less income tax. Fewer people buying houses and falling prices mean less money from stamp duty, where tax take is down 40 per cent. Because of the scale of these global problems, it is inevitable that tax revenues will take some years to come back up. That all means that borrowing will be significantly higher than forecast.

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 £78 billion this year and £118 billion next, or 8 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 £105 billion, then £87 billion, then £70 billion and then £54 billion. By 2015-16, we will again be borrowing only to invest. [ Interruption. ]

Embed this video

Copy and paste this code on your website