Doubts over whether pre-budget measures will prevent recession

November 24, 2008

Roger Bootle is economic adviser to Deloitte. The views expressed are his own.

The Chancellor was right to try to give some help to the economy but, while the scale of the increase in future borrowing is huge, the economic effect of the reduction in VAT will be tiny.

The size of the PBR package, about £9 billion this year, rising to £16bn next year, was roughly equal to what had been mooted in the media. But the scale of the measures, although they sound large, is in fact small.

They amount to only about 1% of GDP next year. The Treasury itself has estimated that this will reduce the extent of the downturn in the economy by just half a percentage point, not enough to prevent a severe recession. roger-bootle

What’s more, there must be doubts over whether they will have even that effect. As expected, the centre-piece was a temporary reduction in VAT from 17.5% to 15%. But while this measure will put money in consumers’ pockets in time for Christmas, it is not clear what impact this will have on spending or overall economic growth.

This is partly because the cut in VAT will not be fully passed on and that bit which is will be partly saved.
Although the borrowing numbers reach 8% of GDP, roughly equal to what they reached in the mid 1970s and early 1990s recessions, this is predicated on the assumption that by 2010 the economy is recovering again.

We suspect, by contrast, that it will still be contracting. Accordingly, the borrowing numbers could easily end up much higher.

The key to the economic environment is going to be the behaviour of the banks. The Chancellor may well have to take more effective control of them to ensure that they carry on lending.


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