Economic Weekly by Lloyds TSB

Borrowing to rise sharply with a stimulus package of £20bn… The Chancellor confirmed in the 2008 Pre-Budget Report (PBR) that the budget deficit is to rise to £118bn next year, or 8% of gdp, a ratio not seen since 1993, and with the sharpest rise in the ratio seen since the 1970s.

Borrowing to rise sharply with a stimulus package of £20bn… The Chancellor confirmed in the 2008 Pre-Budget Report (PBR) that the budget deficit is to rise to £118bn next year, or 8% of gdp, a ratio not seen since 1993, and with the sharpest rise in the ratio seen since the 1970s. But the global financial crisis means that the government has little choice but to take debt onto the public sector balance sheet, otherwise the economic slowdown will be even worse and the financial sector could be put at unacceptable risk of systemic failure.
But slower economic growth and the inability to therefore raise taxes will push up borrowing to very high levels.

The ‘golden rule’ to borrow over an economic cycle only to invest is officially discarded until 2016, when the current budget is expected to balance, but in reality it may not return to that steady state even then. On official projections, net debt will rise to 57% of gdp from 36.3% last year, or more than £1trillion, before starting to decline in 2015/16. In order to stop debt rising, tax increases are planned and slower growth of public spending relative to gdp in the period after the recession ends, expected to be in 2010. However, the tax rise
seems small set against the big rise in debt that is expected to take place and the public spending constraint of just 1.2% real growth a year may be difficult to achieve (though in its first two years after being elected in 1997, the current government managed to stick to even tougher spending plans inherited from the conservatives).

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