Weekly Economics Analysis by Lloyds TSB

UK Budget 2009 announcements were as grim as expected. Official borrowing will reach over 12% of the economy in the current financial year, or £175bn.

Overview

UK Budget 2009 announcements were as grim as expected. Official borrowing will reach over 12% of the economy in the current financial year, or £175bn. It will fall only slightly in 2010/11 to £173bn, and to 11.9% of the economy if the official forecast of 1.25% growth for 2010 proves correct. If the official growth forecast is not met, however, the actual borrowing outcome in 2010/2011 may be as much or higher than this year. These figures must be seen against the backdrop of a continuing global financial crisis and a world economy in synchronised recession, making it the worst downturn since the 1940s. In spite of the efforts to mitigate the effect of the current crisis, it is still not even clear that the worst is yet over. This is the context for the big increases in public sector government borrowing that were announced in the 2009 Budget.

 When will recession end and borrowing start falling? From the Budget details, the next two years are assumed to be the worst and so borrowing only starts to fall steeply from 2011/12 as economic growth is assumed to rise by 3.5% in 2011. There will likely be vigorous debate about whether the medium term projection is one that sets out a path to sustainable deficits. However, the official assumption is that by 2013/14, government borrowing is down to 5.5% of gdp from a peak of over 12% this year and balance is achieved by 2017/18. This is based on tough spending control and assumptions about strong economic growth, efficiency savings and fiscal drag.

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