First published in the Telegraph on 23 April 2009
There is a long-observed tradition in the Treasury on Budget Day: civil servants, economists and advisers leave their desks, file downstairs and watch the Chancellor deliver his speech on the big screens in the canteen. The atmosphere is usually pretty festive – whoops, cheers and applause are common – and who can blame the wonks? All those months slaving over the nation’s accounts, trying to satisfy their ministerial masters’ unreasonable demands, are over.
Yesterday, though, the mood in Horse Guards Road was different. It wasn’t merely the fact that there was so little good news in the report; nor that it comes against the backdrop of the worst financial crisis in history and the nastiest economic downturn since the 1930s. It was that most of the big cheeses simply weren’t there. Instead, they were upstairs at their desks, glued to the screens of the Bloomberg terminals that were tracking the markets’ reaction.
The picture wasn’t an encouraging one. As soon as Alistair Darling sat down and the Treasury released the full details of its borrowing plans, the screens started to bleed red. The price of government debt dropped ever lower as the truth suddenly dawned on everyone from traders in London and New York to central bankers in Beijing and Tokyo: this Government is about to earn the dubious distinction of borrowing enough to fight a world war purely to clean up its own economic mess.
The amount to be borrowed, this year and next, dwarfs anything that has been foisted on the British public since war bonds were issued in the 1940s – and the Government cannot rely on patriotic citizens to lap up its debt this time. Neither, one presumes, can it use force majeure to keep the interest rates on its bonds down to an affordable level.
And as yesterday afternoon wore on, one thing became clear: having seen the Government’s true colours, investors are no longer willing to receive such paltry returns on their money. The associated prospect – that the Government may struggle to find enough buyers for its debt in the coming years – is very real.
Last month saw the first failure of a conventional gilt auction – the process by which the Government offers its debt up for sale – since 1995. Given that the Bank of England is currently in the market for up to pounds 75 billion of gilts through its quantitative easing programme, the Treasury should have no problem offloading the stuff for another few months.
But when the easing ends in a year’s time, how much appetite will remain among investors for the hundreds of further billions the Government plans to issue?
The figures are eye-watering. Cast your mind back a year. In the 2008 Budget, the Chancellor pledged to borrow a total of pounds 120 billion between now and 2013. Yesterday, he said he would manage to rack up that much debt in the first eight months of this year alone. Over the 2009-2013 period he expects to borrow a staggering pounds 606 billion.
The figures would be worse still – far worse – were his economic forecasts at all realistic. His projection of an economic contraction of 3.5 per cent this year is probably fair – indicating that this will be the worst single peacetime year for our economy since the 1930s. But few economists in their right mind expect anything like a recovery before the end of the year. However, Mr Darling somehow expects consumers to have started spending again by next year, as if the credit crunch had never happened; he expects the financial services sector to start turning in profits before anyone in the City believes it will.
If he were being realistic, he would forecast a fall in economic output again next year – and the public finances would look far bleaker than they do even in the Budget documentation.
The only reason the UK has been able to rescue its banks, and to pump extra cash into the economy in the form of unemployment benefits and the small and temporary Budget giveaway this year, is because we have been able to sell gilts at a low interest rate. Those days are surely over. Either the interest rate on those bonds will have to rise, meaning higher borrowing costs for everyone in the UK in the coming decades, or Britain must either default or be bailed out by the International Monetary Fund. Simple as that.
When this is combined with the Budget’s extraordinary assault on the savings and earnings of Britain’s most prosperous, it means Labour has laid itself open both to a full-on Conservative assault for harpooning Britain’s most successful workers, and to economic derision as it spells out the full horror of its fiscal legacy.
This was the elephant that was sitting in the corner of the Treasury yesterday, casting its enormous shadow over proceedings. The ministers who delivered the Budget may be turfed out next year, but Treasury workers who were biting their nails in front of those terminals will be cleaning up their bosses’ mess for decades to come.